As filed with the Securities and Exchange Commission on May 7, 2001
Registration No. 333-55722
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SUMMIT LIFE CORPORATION
(Exact name of Registrant as specified in its charter)
OKLAHOMA
(State or other jurisdiction of incorporation or organization)
6311 73-1448244
(Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code Number)
3021 Epperly Dr.
P.O. Box 15808
Oklahoma City, Oklahoma 73155
(405) 677-0781
(Address, including zip code, and telephone number, including area code, of
Registrants' principal executive offices)
CHARLES L. SMITH
President and Chief Operating Officer
Summit Life Corporation
3021 Epperly Dr.
P.O. Box 15808
Oklahoma City, Oklahoma 73155
(405) 677-0781
(Name, address, including zip code, and telephone number, including area code,
of agents for service)
COPIES TO:
JEANETTE C. TIMMONS, ESQ.
Day Edwards Propester & Christensen, P.C.
2900 Oklahoma Tower
210 Park Avenue
Oklahoma City, Oklahoma 73102
(405) 239-2121
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
[RED HERRING LANGUAGE]
The information in this prospectus is not complete and may be changed. Summit
Life may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY __, 2001
SUMMIT LIFE CORPORATION
200,000 Minimum, 1,000,000 Maximum Shares of Common Stock
Offering Price $1.00 Per Share
We are offering a minimum of 200,000 shares and a maximum of 1,000,000
shares of our common stock. We will offer the shares ourselves and do not plan
to use underwriters. Our common stock is quoted on the OTC Bulletin Board under
the symbol "SUMC." On April 17, 2001, the closing sales price of the
common stock was $1.05.
Investing in our common stock involves risks that are described in the "Risk
Factors" section beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Total Total
Per Share Minimum Maximum
--------- ---------- ----------
Public Offering Price................................ $1.00 $ 200,000 $1,000,000
Underwriting Discount................................ -- -- --
Proceeds to Summit Life (before expenses) ........... $1.00 $ 200,000 $1,000,000
o We will sell the units ourselves and no one has agreed to buy
any of our shares. After the minimum offering is sold, we may
enter into an agency agreement with one or more registered
broker-dealers or registered sales agents for the sale of
shares, in which event we may pay participating registered
broker-dealers or registered sales agents commissions of up to
6% of the offering price of shares actually sold by them.
However, we have no agreements with anyone to pay any such
fees or commissions, and in no event will we utilize any
broker-dealers or agents until at least the minimum offering
is sold.
o The offering is for a period of 360 days beginning with the
date of this prospectus and, at our option, the offering
period may be extended for an additional 90 days. The minimum
number of shares one can purchase is 100 shares.
o Proceeds from sales of the shares are being escrowed at UMB
Oklahoma Bank, National Association, Oklahoma City, Oklahoma,
until the sale of the 200,000 minimum number of shares is
achieved. If the minimum of $200,000 in proceeds is not
received prior to the expiration of the offering period, all
escrowed funds will be promptly returned to subscribers, with
interest.
--------------------------
Summit Life Corporation
3021 Epperly Dr.
P.O. Box 15808
Oklahoma City, Oklahoma 73155
(405) 677-0781
--------------------------
The date of this Prospectus is ________________, 2001.
TABLE OF CONTENTS
Page Page
Forward-Looking Information.......... 1 Management..................................... 25
Prospectus Summary................... 2 Certain Transactions........................... 27
Risk Factors......................... 4 Principal Stockholders......................... 27
Use of Proceeds...................... 9 Description of Capital Stock................... 28
Determination of Offering Price...... 10 Shares Eligible for Future Sale................ 31
Price Range of Common Stock.......... 10 Plan of Distribution........................... 32
Dividend Policy...................... 10 Where You Can Find More Information............ 33
Dilution of the Price Paid Legal Opinions................................. 34
for the Shares..................... 11 Experts........................................ 34
Capitalization....................... 12 Index to Financial Statements.................. F-1
Selected Financial Data.............. 13
Management's Discussion and
Analysis or Plan of Operation...... 14
Business............................. 17
---------------------------
You should only rely on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
---------------------------
Summit Life Corporation, referred to in this prospectus as Summit Life,
we or us, is an insurance holding company. We were incorporated in Oklahoma in
April 1994. Our executive offices are located at 3021 Epperly Dr., Oklahoma
City, Oklahoma 73155. Our telephone number is (405) 677-0781. We refer to
prospective investors as you or the investor(s).
i
FORWARD-LOOKING INFORMATION
In this prospectus, we make statements about our future financial
condition, results of operations and business. These are based on estimates and
assumptions made from information currently available to us. Although we believe
these estimates and assumptions are reasonable, they are uncertain. These
forward-looking statements can generally be identified because the context of
the statement includes words such as may, will, expect, anticipate, intend,
estimate, continue, believe or other similar words. Similarly, statements that
describe our future expectations, objectives and goals or contain projections of
our future results of operations or financial condition are also forward-looking
statements. We wish to caution you that these forward-looking statements involve
predictions. We cannot give you any assurance that the future results will be
achieved or that, if achieved, such results will be indicative of the results in
subsequent periods. The inclusion of forward-looking statements in this
prospectus should not be regarded as a representation by us or any other person
that our objectives or plans will be achieved or that our operating expectations
will be realized. Our future results, performance or achievements, could differ
materially from those expressed or implied in these forward-looking statements,
as a result of risks facing us as more fully described in the "Risk Factors"
section of this prospectus. Such risks include those associated with:
[ ] actual execution of management's business plan;
[ ] the condition of the insurance market;
[ ] the pricing of products and services;
[ ] overall economic trends, including interest rate trends;
[ ] stock market activity, employment levels, changes in technology,
changes in insurance laws and regulations;
[ ] other factors beyond our control.
We undertake no obligation to update or revise publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained throughout this
prospectus.
1
PROSPECTUS SUMMARY
This section is only a summary and does not contain all the information that may
be important to you. You should read the entire prospectus carefully, including
the section titled "Risk Factors" and the financial statements and the notes
relating to those statements.
About Summit Life
Summit Life is an insurance holding company. Historically, our growth
has been fueled primarily through acquisitions, starting 1994 when we commenced
operations by acquiring an Oklahoma-chartered life insurance company. Since
then, we have acquired three additional life insurance companies in Texas and
Louisiana. Currently, our life insurane operations are conducted through our
wholly owned subsidiary, Great Midwest Life Insurance Company, referred to in
this prospectus as Great Midwest, a Texas-chartered insurer that issues life
insurance and annuity products and operates in both Texas and Oklahoma.
Our operating strategy is to continue to make acquisitions of small,
marginally profitable or unprofitable insurance companies, consolidate and
streamline the administrative functions of these small companies, improve their
investment yields through sctive asset management in a centralized investment
operation and eliminate their unprofitable products and distribution channels.
Because of the small size of these companies, we believe that they are
unattractive acquisition candidates for many of our competitors. However,
because we also are small compared to our competition, we believe that we are
particluarly well suited to make such acquisitions and to capitalize on the cost
savings that can be realized by consolidating the administrative functions of
the acquired companies.
We were incorporated as an Oklahoma coporation in April 1994. Our
principal executive office is at 3021 Epperly Dr., Oklahoma City, Oklahoma
73155. Our telephone number is (405) 677-0781.
Use of Proceeds
Assuming the minimum offering gross proceeds of $200,000, net proceeds
may be used to recruit agents, acquire life insurance companies or blocks of
life insurance business, and for other, general corporate puposes. Any funds
received above the minimum offering amount will be used for these purposes and
also may be used to repay outstanding indebtedness. We are targeting companies
in select markets with average books of business of $300,000 in policy reserves.
The Offering
Common stock offered by Summit Life:
Maximum................. 1,000,000 shares
Minimum................. 200,000 shares
Common stock outstanding:
Prior to this offering.. 2,267,605 shares
After this offering..... 3,267,605 shares assuming the maximum offering is sold
2,467,605 shares assuming the minimum offering is sold
Offering price........... $1.00 per share
2
Summary Financial Data
Operating Data
The following table sets forth selected information regarding operating
results for the periods indicated.
Year Ended
December 31,
----------------------
1999 2000
---------- ----------
(in thousands)
Statement of Operations Data:
Revenues $ 813 $ 571
Benefits, losses and expenses 1,704 975
Net Loss (884) (404)
Balance Sheet Data
As of December 31, 2000
-----------------------------------------------
As Adjusted (1)
-----------------------------------
Actual Minimum Offering Maximum Offering
------ ---------------- ----------------
(in thousands)
Balance Sheet Data
Cash and cash equivalents $1,436 $1,596 $2,159
Total assets 6,163 6,323 6,886
Total liabilities 5,187 5,187 5,010
Stockholders' equity 975 1,135 1,875
----------------
(1) Gives effect to the sale of the minimum and maximum number of shares of
common stock offered hereby, and the application of the estimated proceeds
therefrom. See "USE OF PROCEEDS" and "CAPITALIZATION."
3
RISK FACTORS
You should carefully consider the following factors and other
information in this prospectus before deciding to invest in any of our
securities.
We operate in a highly competitive industry, which could limit our ability to
gain or maintain our position.
We are in direct competition with a large number of insurance
companies, many of which offer a greater number of products through a greater
number of agents and have greater resources than we do. In addition, we may be
subject, from time to time, to new competition resulting from additional private
insurance carriers introducing products similar to those offered by us.
Moreover, as a result of recent federal legislation, commercial banks, insurance
companies, and investment banks may now combine, provided certain requirements
are satisfied, and we expect to encounter increased competition from these
providers of financial services. This competitive environment could result in
lower premiums, less favorable underwriting terms and conditions, loss of sales
and reduced profitability.
Over the past three fiscal years, substantially all of our premiums
were from sales of policies in Oklahoma and Texas. Our ability to compete
successfully may suffer from competitive changes in these particular markets.
Our lack of a rating could adversely affect our ability to compete.
Ratings of insurance companies are typical within the industry.
Increased public and regulatory concerns regarding the financial stability of
insurance companies have resulted in policyholders placing greater emphasis upon
company ratings and have created some measure of competitive advantage for
insurance carriers with higher ratings. Rating organizations assign ratings
based upon several factors. While most of the considered factors relate to the
rated company, some of the factors relate to general economic conditions and
circumstances outside the rated company's control. As of the date of this
prospectus, we have not been rated by any rating organization. The absence of
any rating could adversely affect our ability to sell our products or retain
existing business, as well as our ability to compete for attractive acquisition
opportunities.
We may not be able to compete successfully if we cannot recruit and retain
insurance agents.
We continuously recruit and train independent agents to market and sell
our products. We may not be able to continue to attract and retain independent
agents to sell our products. We also engage marketing general agents from time
to time to recruit independent agents and develop networks of agents in various
states. Our business and ability to compete may suffer from the inability to
recruit and retain insurance agents and from the loss of services provided by
our marketing agents.
Our policy claims fluctuate from year to year, and future benefit payments may
exceed reserves.
Our results may fluctuate from year to year due to fluctuations in
policy claims received by our life insurance subsidiary. Great Midwest has
established reserves for claims and future policy benefits based on accepted
actuarial practices. By care in underwriting new policies and sharing risk with
reinsurance companies, Great Midwest has attempted to limit the risk that its
actual payments of death and other benefits will exceed its reserves. The
reserves are, however, only actuarial estimates and it is possible that Great
Midwest's claims experience could be worse than anticipated, so that its
reserves may prove to be insufficient. If this were to happen, it could result
in increased operating losses.
We could be forced to sell illiquid investments at a loss to cover policyholder
withdrawals.
Many of the products offered by Great Midwest allow policyholders and
contractholders to withdraw their funds under defined circumstances. Great
Midwest manages its liabilities and configures its investment portfolio so as to
provide and maintain sufficient liquidity to support anticipated withdrawal
demands, contract benefits and maturities. While Great Midwest owns a
significant amount of liquid assets, a certain portion of its assets are
relatively illiquid. Unanticipated withdrawal or surrender activity could, under
some circumstances, compel Great Midwest to dispose of illiquid assets on
unfavorable terms, which could have an adverse effect on us.
4
Interest-rate fluctuations could negatively affect our spread income.
Significant changes in interest rates expose insurance companies to the
risk of not earning anticipated spreads between the interest rate earned on
investments and the credited interest rates paid on outstanding policies. Both
rising and declining interest rates can negatively affect our spread income.
While we develop and maintain asset/liability management programs and procedures
designed to preserve spread income in rising or falling interest rate
environments, changes in interest rates could adversely affect such spreads.
Lower interest rates may result in lower sales of certain of our
insurance and investment products. In addition, certain of our insurance
products guarantee a minimum credited interest rates.
Our insurance subsidiary is highly regulated, and government regulation may
affect profitability or market value.
Our insurance subsidiary is subject to government regulation in each of
the states in which it conducts business. Such regulation is vested in state
agencies having broad administrative power dealing with many aspects of the
insurance business, which may include premium rates, marketing practices,
advertising, policy forms, and capital adequacy, and is concerned primarily with
the protection of policyholders rather than share owners. Changes in these
regulations could affect our profitability or the market value of our shares.
Our insurance subsidiary acts as a fiduciary and is subject to
regulation by the United States Department of Labor when providing a variety of
products and services to employee benefit plans governed by the Employment
Retirement Income Security Act, or ERISA. Severe penalties are imposed on
insurers that breach their fiduciary duties to the plans under ERISA. If we were
fined or a penalty was imposed on us by a governmental agency having
jurisdiction over us, we might not have the financial resources to pay the fine
or penalty.
We cannot predict the effect of recent insurance regulatory changes.
The National Association of Insurance Commissioners, or the NAIC, has
adopted the Codification of Statutory Accounting Principles, which we refer to
as the "Codification." The Codification changes current statutory accounting
rules in several areas. We have not estimated the potential effect that the
Codification may have on the statutory capital of our insurance subsidiary. The
Codification became effective January 1, 2001.
A tax law change could adversely affect our ability to compete with
non-insurance products.
Under the Internal Revenue Code of 1986, as amended, which we refer to
as the "Code," income tax payable by policyholders on investment earnings is
deferred during the accumulation period of certain life insurance and annuity
products. This favorable tax treatment may give certain of our products a
competitive advantage over other non-insurance products. To the extent that the
Code is revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including Great Midwest, would be adversely affected with
respect to their ability to sell such products, and, depending on grandfathering
provisions, the surrenders of existing annuity contracts and life insurance
policies. In addition, life insurance products are often used to fund estate tax
obligations. If the estate tax were eliminated, the demand for certain life
insurance products could be adversely affected. We cannot predict what tax
initiatives may be enacted which could adversely affect us.
Our investments are subject to risks.
Our invested assets are subject to customary risks of credit defaults
and changes in market values. The value of our investment portfolio depends in
part on the financial condition of the companies in which we have made
investments. Factors that may affect the overall market value of our invested
assets include interest rate levels, financial market performance, and general
economic conditions, as well as particular circumstances affecting the
businesses of individual companies.
5
Our growth from acquisitions involves risks.
Our acquisitions have benefited us in part by allowing us to enter new
markets and to position us to realize certain operating efficiencies associated
with economies of scale. There can be no assurance, however, that we will
realize the anticipated financial results from our acquisitions or that suitable
acquisitions, presenting opportunities for continued growth and operating
efficiencies, or capital to fund acquisitions will continue to be available to
us.
We are dependent on the performance of others.
Our results may be affected by the performance of others because we
have entered into various arrangements involving other parties. For instance,
many of our products are sold through independent distribution channels.
Additionally, a portion of our life insurance sales comes from arrangements with
unrelated marketing organizations. As with all financial services companies, our
ability to conduct business is dependent upon consumer confidence in the
industry and its products. Actions of competitors, and financial difficulties of
other companies in the industry, could undermine consumer confidence and
adversely affect our business.
A decline in our stock price may limit our ability to raise capital.
During 1999 and 2000, many financial services companies, including
Summit Life, experienced a decrease in the market price of their common stock.
Although we believe we have sufficient, internally generated cash flow to fund
our day-to-day operations, a lower stock price may limit our ability to raise
capital to fund other growth opportunities and acquisitions.
Our reinsurance program involves risks.
Great Midwest is able to assume insurance risks beyond the level which
its capital and surplus would support by transferring substantial portions of
such risks to other, larger insurers through reinsurance contracts. These
reinsurance arrangements, which are the usual practice in the insurance
industry, leave Great Midwest exposed to two risks:
-- The credit risk, which exists because reinsurance does not
fully relieve Great Midwest of its liability to its insureds
for the portion of the risks ceded to reinsurers. Although
Great Midwest places its reinsurance with reinsurers it
believes to be financially stable, a reinsurer's subsequent
insolvency or inability to make payments under the terms of a
reinsurance treaty could have a materially adverse effect on
our financial condition.
-- The amount and cost of reinsurance available to Great Midwest
is subject, in large part, to prevailing market conditions
beyond its control. Non-renewal or cancellation of a
reinsurance arrangement affects only new business and the
reinsurer remains liable on business reinsured prior to
non-renewal or cancellation. If Great Midwest were to be
unable to maintain or replace its reinsurance facilities on
acceptable terms upon their expiration and were unwilling or
unable to bear the associated increase in exposure on new
business, it would have to reduce the amount of its new
business.
We are dependent on dividends and management fees from our insurance subsidiary,
Great Midwest, to fund our operations.
Our ability to fund our operations is affected by the ability of our
insurance company subsidiary, Great Midwest, to declare and distribute dividends
to us as its sole shareholder, as well as on its ability to pay us management
fees for the administrative services we provide to it. Insurance company
subsidiaries like Great Midwest are subject to various state statutory and
regulatory restrictions, applicable to insurance companies generally, that limit
the amount of cash dividends, loans and advances that those subsidiaries may pay
to their parent companies. Under Texas insurance laws, our principal operating
subsidiary, Great Midwest, generally may pay dividends to us only out of its
unassigned surplus as reflected in its statutory financial statements filed in
that state. In addition, the Texas Commissioner of Insurance must approve, or
not disapprove within 30 days of notice, payment of an "extraordinary" dividend
from Great Midwest. Under Texas insurance laws, that term generally refers to a
dividend that exceeds, together with all dividends paid by Great Midwest within
the previous 12 months, the greater of:
-- 10% of Great Midwest's statutory capital and surplus at the
preceding December 31; or
-- the net gain from operations of Great Midwest for the 12
months ended on such December 31.
6
It is possible that more stringent restrictions will be adopted from
time to time, which could have the effect, under certain circumstances, of
significantly reducing dividends or other amounts payable to us by our insurance
subsidiary without affirmative prior approval by state insurance regulatory
authorities.
In the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of an insurance subsidiary of Summit Life, all
creditors of the subsidiary, including holders of life insurance policies, would
be entitled to payment in full out of the assets of such subsidiary before
Summit Life, as shareholder, would be entitled to any payment.
Our stockholders could be adversely affected if our management and larger
stockholders use their influence in a manner adverse to other stockholders'
interests.
Upon completion of this offering, and assuming the maximum 1,000,000
shares are sold, executive officers and directors and 5% stockholders will
beneficially own, in the aggregate, approximately 46% of our outstanding common
stock. While such a percentage is not sufficient to constitute control as a
matter of law, it represents a percentage that is likely to result in effective
control over matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions, which could delay
or prevent someone from acquiring or merging with us. These stockholders may use
their influence to approve or take actions that are adverse to your interests.
See "Principal Stockholders."
Our stockholders also could be adversely affected if existing change of
control provisions prevented a potential suitor from buying us.
Anti-takeover provisions of our certificate of incorporation, as well
as statutory change-of-control provisions, could operate to hinder a potential
suitor from buying us, even if the sale of our company would be in the best
interests of our stockholders:
-- Our Certificate of Incorporation contains provisions that give
the board of directors the ability to deter or prevent a
merger with, or a sale of control to, a third party, even if
the owners of a majority of the common stock were to favor
such a transaction. Our Certificate of Incorporation
authorizes the board of directors to issue a series of
preferred stock without shareholder action. Such an issuance
of preferred stock could discourage a third party from
attempting to acquire, or make it more difficult for a third
party to acquire, a controlling interest in Summit Life, and
could adversely affect the voting power or other rights of
holders of the common stock. In addition, the Certificate of
Incorporation establish a board of directors classified such
that only one-third of the members of our board of directors
is elected each year and each director serves for a term of
three years. These provisions make it difficult for a third
party to achieve a change in control of Summit Life through
the acquisition of a large block of common stock without
approval of the board of directors. As a result of these
anti-takeover provisions, you may be deprived of opportunities
to sell some or all of your shares at prices exceeding market
prices. See "Description of Capital Stock-Certain
Anti-Takeover Provisions" at page 31.
-- We are also regulated as an insurance holding company in
Texas, the jurisdiction in which our insurance company
subsidiary is incorporated. These laws require prior approval
by the Texas Department of Insurance of changes in control of
an insurer. Under these laws, anyone acquiring a specified
percentage of Summit Life's outstanding voting securities
would be presumed to have acquired control of it, unless such
presumption is rebutted. The specified percentage is 10% under
Texas insurance law.
7
There is a limited market for the shares of common stock.
Historically, there has been an extremely limited public market for our
common stock issued in connection with our initial public offering in 1999. We
cannot guarantee that the market will be sustained or will expand. The price of
the common stock is highly volatile. Due to the limited trading volume and small
capitalization of our common stock, many investors may not be interested in
owning our securities because of the higher risks associated with limited
trading volume and small market capitalization such as the inability to sell a
substantial block of stock at one time without driving down prices. This could
have an adverse effect on the market for our common stock. In addition, there is
no assurance that an investor will be in a position to borrow funds using our
securities as collateral because lenders may be unwilling to accept the pledge
of these securities because of the limited market.
Additionally, the shares are defined as penny stock under the
Securities and Exchange Act of 1934 and rules of the SEC. These rules impose
additional sales practice and disclosure requirements on broker-dealers who sell
our shares to persons other than certain accredited investors. For covered
transactions, a broker-dealer must make a suitability determination for each
purchaser and receive a purchaser's written agreement prior to sale. In
addition, the broker-dealer must make certain mandated disclosures in
transactions of penny stocks. Consequently, these rules may affect the ability
of broker-dealers to make a market in our common stock and may affect investors'
ability to resell shares purchased in this offering.
We have arbitrarily determined the offering price of the common stock included
in this offering.
The offering price for the common stock in this offering was based upon
our assessment of recent trading prices for the common stock, our history and
prospects, and current conditions in the securities markets. There is no
relationship between the offering price and our assets, book value, net worth or
any other economic or recognized criteria of value.
Future sales of shares by our current stockholders could adversely affect the
market price of our common stock.
After completion of this offering, there will be 3,267,605 shares of
our common stock outstanding if all the shares offered hereby are sold, of which
2,267,605 shares, or approximately 69.40%, will be held by our current
stockholders. Of the amount held by the current stockholders, 163,770 shares
were purchased in our initial public offering in 1999 and are freely tradable.
The balance may be sold under Rule 144 in the public market from time to time,
without registration, subject to limits on the timing, amount and method of
these sales imposed by the securities laws. You should be aware that the
possibility of sales may, in the future, have a depressive effect on the price
of the common stock in any market which may develop and, therefore, the ability
of any investor to market his shares may depend upon the number of shares that
are offered and sold. Moreover, the perception in the public markets that these
sales by principal stockholders might occur could also adversely affect the
market price of our common stock.
8
USE OF PROCEEDS
The net proceeds to us from the sale of the common stock, after
deducting offering expenses, are expected to be approximately $160,000 if the
minimum number of 200,000 shares are sold or $900,000 if the maximum number of
1,000,000 shares are sold. The following table shows our expected net proceeds
at minimum and maximum levels of funding and our proposed expenditure of these
proceeds.
Minimum Offering Maximum Offering (1)
---------------- ----------------
Use of Net Proceeds Amount Percent Amount Percent
------------------- ------ ------- ------ -------
Increase surplus $ -- -- $170,000 18.89%
Repayment of indebtedness -- -- 177,500 19.72%
Recruitment of agents 50,000 47.06% 42,500 4.72%
Purchase other blocks of business 100,000 47.06% 450,000 50.00%
Working capital and general corporate purposes 10,000 5.88% 60,000 6.67%
-------- -------- -------- --------
Total $160,000 100.00% $900,000 100.00%
======== ======== ======== ========
(1) After the minimum number of 200,000 shares are sold, we may
enter into an agency agreement with one or more registered
broker-dealers or registered sales agents for the sale of
shares, in which event we may pay participating registered
broker-dealers or registered sales agents commissions of up to
6% of the offering price of shares actually sold by them.
However, we have no agreements with anyone to pay any such
fees or commissions. If we enter into an agency agreement, as
discussed above, commissions will be paid from the amount of
proceeds allocated to working capital.
o The expenses of this offering, which include legal and
accounting fees, blue sky fees of various states, printing,
mailing and miscellaneous items, are estimated to be $40,000
if only the minimum offering is sold, and $100,000 if the
maximum offering is sold. As of December 31, 2000, we had paid
approximately $2,000 of these expenses from funds on hand
prior to the offering.
o We plan to use a substantial amount of the net proceeds to (i)
acquire other blocks of business, (ii) recruit agents, (iii)
increase the surplus of our insurance subsidiary, which will
enable that company to increase its sales of insurance
products, and (iv) pay off debt. The actual allocation of net
proceeds, however, will depend on the actual amount of funds
raised by this offering, as well as the projected needs of
surplus to write new business. If results do not meet our
requirements, we may reallocate the proceeds among the other
contemplated uses of proceeds. We may use a portion of the net
proceeds to acquire the net assets of other insurance
companies. Any decision to make an acquisition will be
dependent on consideration of a variety of factors, including
business prospects, purchase price and financial terms of the
transaction. We have no agreements, understandings or
arrangements with respect to any acquisition at this time. See
"BUSINESS."
o The amounts set forth above are estimates only. Consequently,
the actual amounts are likely to vary from that described. To
the extent proceeds are inadequate in any area of expenditure,
supplemental amounts may be drawn from working capital, if
available. Any additional proceeds necessary for operation
will be obtained through debt financing or additional equity
financing. However, we have no specific plans for future
financing and the officers and directors have made no
commitment to advance funds to us. Any proceeds not required
for one or more of the proposed expenditures listed above we
will retain and use as working capital which we will use for
one or more of the other purposes specified in the above table
as in our discretion will be beneficial to our operations and
business. For example, we may use a portion or all of the
amounts allocated to working capital to increase surplus or to
purchase additional blocks of business.
o Pending utilization, we may make temporary investments of the
proceeds in interest bearing investments, including United
States government securities, short-term certificates of
deposit, money market funds or other short-term interest
bearing investments. We do not intend to register as an
investment company under the Investment Company Act of 1940.
Accordingly, any investment by us will be made so as to avoid
regulation as an investment company.
o We anticipate, based on currently proposed plans and
assumptions relating to our operations, that the proceeds from
the offering, together with projected cash flow from
operations, will be sufficient to meet estimated capital
expenditures through 2001. If cash flows do not develop as
anticipated, or if the Company's proposed plans or the basis
for its assumptions change, the Company may be required to
obtain additional sources of capital.
9
DETERMINATION OF OFFERING PRICE
The price of the shares was arbitrarily determined in order for Summit
Life to raise up to a total of $1,000,000 in this offering. The offering price
bears no relationship whatsoever to our assets, earnings, book value, or other
established criteria of value. We also did not consult finance professionals to
help establish the offering price. There is no assurance that the price paid for
a share in the offering will be recoverable by a sale of the share in the public
market, or that a public market will value the company as we have determined its
value.
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the OTC Bulletin Board on October 27,
1999, under the symbol "SUMC." The following table sets forth, for the periods
indicated, the high and low bid prices of the common stock during the periods
indicated, as reported by the OTC Bulletin Board:
High Low
---- ---
1999
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter (commencing October 27, 1999) $ 6.00 $ 5.00
2000
First Quarter $ 4.00 $ 4.00
Second Quarter $ 1.875 $ 1.875
Third Quarter $ .438 $ .438
Fourth Quarter $ .531 $ .531
2001
First Quarter $ .531 $ .25
Second Quarter (through April 17, 2001) $ 1.05 $ .25
The above quotations, as reported, represent prices between dealers and
do not include retail mark-ups, mark-downs or commissions. Such quotations do
not necessarily represent actual transactions.
On April 17, 2001, the closing sales price for the common stock was
$1.05.
At April 17, 2001, there were approximately 1,424 registered holders of
record of the common stock.
DIVIDEND POLICY
We expect to retain all earnings generated by our operations, if any,
for the growth of our business. We do not anticipate paying any cash dividends
on our common stock in the foreseeable future. Our ability to pay dividends is
dependent, in large measure, on our ability to receive dividends and management
fees from our life insurance subsidiary, Great Midwest. The ability of Great
Midwest to pay dividends and management fees, in turn, is limited pursuant to
the insurance laws of the state of Texas, where Great Midwest is domiciled.
Generally, such laws provide that dividends may be paid only from the earned
surplus arising from the insurance company's business and must receive the prior
approval of the Texas Insurance Commissioner to pay a dividend if such dividend
would exceed certain statutory limitations. See "BUSINESS-Governmental
Regulation."
10
The payment of future dividends on the common stock, both as to timing
and amount, will be determined by our board of directors in light of our
earnings, financial condition, capital requirements and other factors. We may
not pay dividends on the common stock unless we have paid dividends on our
Series A and Series B Preferred Stock.
DILUTION OF THE PRICE PAID FOR THE SHARES
At December 31, 2000, we had a net tangible book deficit of ($355,466)
or ($.16) per share of common stock. Net tangible book deficit is equal to total
tangible assets minus total liabilities minus liquidation value of preferred
stock. Our net tangible book deficit per share is calculated by dividing our net
tangible book deficit by 2,267,605, the total number of shares of common stock
outstanding.
At December 31, 2000, after giving pro forma effect to the sale of a
minimum 200,000 shares and a maximum 1,000,000 shares of common stock in this
offering at an assumed initial public offering price of $1.00 per share and the
receipt by us of the net proceeds from this offering, our pro forma net tangible
book value (deficit) at December 31, 2000 would have changed from ($355,466) to
($195,466) and $544,534, respectively. This represents an immediate increase in
net tangible stockholders' equity of $.08 and $.33 per share, respectively, to
current stockholders and an immediate dilution of $1.08 and $.83 per share,
respectively, to new investors, as illustrated in the following table:
Minimum Maximum
Offering Offering
-------- --------
Initial public offering per share........................................... $ 1.00 $ 1.00
Pro forma net tangible book value (deficit) per share after this offering... (.08) .17
-------- --------
Dilution per share to new investors......................................... $ 1.08 $ .83
======== ========
The public offering price is substantially higher than the pro forma
net tangible book value per share. Investors will incur immediate and
substantial dilution.
The following table summarizes the number and percentage of shares
purchased, the amount and percentage of consideration paid and the average price
per share of common stock paid by our existing stockholders and by new investors
in this offering:
Shares Purchased Total Consideration Average
--------------------------------- -------------------------------- Consideration
Number Percent Amount Percent Per Share
------------------- ------------- ------------------ ------------- -------------------
Current Stockholders...... 2,267,605 69.40% $2,946,272 74.66% $1.30
New investors............. 1,000,000 30.60% 1,000,000 25.34% $1.00
--------- ------ --------- ------
Total............... 3,267,605 100.00% 3,946,272 100.00%
========= ------ ========= ------
11
CAPITALIZATION
The following table sets forth (i) our historical capitalization as of
December 31, 2000; and (ii) our pro forma capitalization as adjusted to give
effect to the sale of a minimum of 200,000 shares, and a maximum of 1,000,000
shares, of common stock at an assumed public offering price of $1.00 per share
and the application of the estimated net proceeds as described under "Use of
Proceeds." This table should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis or Plan of Operations" and the
Consolidated Financial Statements and Notes appearing elsewhere in this
Prospectus.
December 31, 2000
------------------------------------------------
As Adjusted As Adjusted
Actual Minimum Offering Maximum Offering
---------- ---------------- ----------------
Liabilities:
Policy reserves and policyholder funds ....................... $ 4,708,295 $ 4,708,295 $ 4,708,295
Unpaid claims ................................................ 175,951 175,951 175,951
Accounts payable ............................................. 39,458 39,458 39,458
Accrued liabilities .......................................... 15,424 15,424 15,424
Notes payable ................................................ 248,254 248,254 70,754
----------- ----------- -----------
Total liabilities ..................................... $ 5,187,382 $ 5,187,382 $ 5,009,882
Stockholders' Equity:
Common Stock, $.01 par value:
5,000,000 shares authorized, 2,267,605 issued and
outstanding, 2,467,605 as adjusted for the minimum
aggregate offering, 3,267,605 as adjusted for the
maximum aggregate offering ............................ 22,676 24,676 32,676
Series A preferred stock, $.001 par value, stated at
liquidation value ....................................... 500,000 500,000 500,000
Series B convertible preferred stock, $.001 par value ..... 350,000 350,000 350,000
Series B convertible preferred stock subscribed ........... 650,000 650,000 650,000
Less Series B convertible preferred stock subscriptions
Receivable ............................................ (650,000) (650,000) (650,000)
Additional paid-in capital ................................ 2,923,596 3,081,596 3,813,596
Common stock of parent held by subsidiary ................. (95,000) (95,000) (95,000)
Accumulated other comprehensive income (loss) ............. (19,882) (19,882) (19,882)
Accumulated deficit ....................................... (2,706,090) (2,706,090) (2,706,090)
----------- ----------- -----------
Total stockholders' equity ............................ 975,300 1,135,300 1,875,300
----------- ----------- -----------
Total capitalization .................................. $ 6,162,682 $ 6,322,682 $ 6,885,182
=========== =========== ===========
12
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with our financial statements and the accompanying notes appearing elsewhere in
this prospectus. You should also read "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION" contained later in this prospectus. The selected financial
data for the years ended December 31, 1999 and 2000 is derived from our
financial statements that have been audited by Grant Thornton LLP, independent
certified public accountants. The selected financial data is not necessarily
indicative of our future results of operations or financial performance. You
should also read "RISK FACTORS" contained in this prospectus.
Years Ended December 31,
-----------------------------
1999 2000
---- ----
(in thousands, except share
and per share data)
Statement of Operations Data:
Total revenues .................... $ 813 $ 571
Net loss .......................... (884) (404)
Basic and diluted loss per share... (.42) (.20)
Shares used in computation ........ 2,177,196 2,248,605
As of December 31, 1999 As of December 31, 2000
----------------------- --------------------------
(in thousands)
Balance Sheet Data:
Invested assets........................... $5,180 $3,972
Total assets.............................. 7,016 6,163
Total policy liabilities.................. 5,336 4,708
Stockholders' equity...................... 1,016 975
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion and analysis reviews our operations for the
years ended December 31, 1999 and 2000. Certain statements contained in this
discussion are not based on historical facts, but are forward-looking statements
that are based upon numerous assumptions about future conditions which may
ultimately prove to be inaccurate and actual events and results may differ
materially from anticipated results described in such statements. Our ability to
achieve such results is subject to certain risks and uncertainties discussed in
the "RISK FACTORS" section of this prospectus. The following discussion and
analysis should be read in conjunction with the discussion about such risk
factors and our financial statements and the notes related thereto included
elsewhere in this prospectus.
Currently, our only business segment is our life insurance operations.
However, in the past, we have also provided residential mortgage loan processing
services to individuals and financing to medical accounts receivable factoring
entities.
Operating Data
The following table sets forth selected information regarding operating
results for the periods indicated.
Year Ended December 31,
--------------------------
1999 2000
----------- -----------
(in thousands)
Statement of Operations Data:
Revenues $813 $ 571
Benefits, losses and expenses 1,704 975
Net Loss (884) (404)
As of December 31, 2000
-----------------------------------------------------------
As Adjusted (1)
-------------------------------------------
Actual Minimum Offering Maximum Offering
------ ---------------- ----------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $1,436 $1,596 $2,159
Total assets 6,163 6,323 6,886
Total liabilities 5,187 5,187 5,010
Stockholders' equity 975 1,135 1,875
-------------------------
(1) Gives effect to the sale of the minimum and maximum number of shares of
common stock offered hereby, and the application of the estimated
proceeds therefrom. See "USE OF PROCEEDS" and "CAPITALIZATION."
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Assets/Liabilities/Stockholders' Equity. Total assets were $6,162,682
at December 31, 2000, compared to $7,015,821 at December 31, 1999, a decrease of
12%. The decrease was due to reductions in policy reserves and the continued
reduction of our outstanding debt.
14
Total liabilities, primarily insurance reserves for future policyholder
benefits, were $5,187,382 at December 31, 2000, compared to $5,999,783 at
December 31, 1999, a decrease of 14%. The decrease was due primarily to the
surrender of annuity policies with a resulting decrease in reserves, and from
repayment of a portion of our outstanding debt.
Total stockholders' equity was $975,300 at December 31, 2000, compared
to $1,016,038 at December 31, 1999, a decrease of 4%. The decrease was primarily
due to our net operating loss and unrealized loss on the available-for-sale
investment portfolio. The decrease was reduced by the sale of Series B preferred
stock during the year.
Our average gross yield on invested assets was approximately 7.2% for
2000 and 7.8% for 1999, while the average rate credited to policyowner accounts
was approximately 5.35% and 5.5%, respectively.
At December 31, 2000, net deferred tax assets totaled $37,241 and
related primarily to net operating loss carryforwards. Realization of net
operating carryforwards is dependent on generating sufficient future taxable
income. We believe that our operating strategy of continuing to make
acquisitions of small insurance companies, consolidating and streamlining the
administrative functions of these small companies, and improving unprofitable
products and distribution channels, will generate future taxable income.
Although realization of net deferred tax assets is not assured, we believe these
sources will generate sufficient future taxable income during the available
carryforward period and that it is more likely than not that the recorded net
deferred tax assets will be realized.
Revenue. Total revenues decreased 30% to $570,757 for the year ended
December 31, 2000, compared to $812,734 for the year ended December 31, 1999.
Revenues attributable to life insurance decreased 28.5% from $213,598 to
$152,624 for the comparable periods. The decrease was due primarily to the sale
of Benefit Capital, which accounted for premium revenue of $67,903, for the 1999
period, or approximately 111% of the total decrease. Premium increased 4.8%
comparatively when Benefit Capital premium is excluded.
Investment income decreased 27%, from $519,434 for the year ended
December 31, 1999 to $377,184 for the year ended December 31, 2000. This
decrease was primarily as a result of a shift in our investment portfolio, which
reduced both investment income and interest expense. The sale of Benefit Capital
also contributed to a decrease in invested assets and a decrease in the
investment income from those assets. For 1999, Benefit Capital contributed
investment income of $60,802, or approximately 43% of the total decrease.
Realized gains on the sale of available for sale investments offset the
decreases in life insurance revenue and investment income, increasing 1662% from
$5,202 to $91,679 for the years ended December 31, 1999 and December 31, 2000,
respectively. We reclassified certain equity securities as trading securities
during 2000, which required the reporting of all unrealized gains and losses in
operations. Due to the recent decline in the stock market, we reported net
losses on trading securities of $159,755. We expect to recover a portion of
these net losses during 2001.
Other income increased 46%, from $74,500 for the year ended December
31, 1999 to $109,025 for the year ended December 31, 2000, primarily due to the
recognition of deferred gains on real estate sold in prior years. During 2000,
we also began recognizing revenues from new administrative service contracts.
Costs and Expenses. Total expenses decreased 43% from $1,703,951 to
$975,178 for the years ended December 31, 1999 and December 31, 2000,
respectively. This decrease was primarily attributable to our sale of Benefit
Capital and the elimination of the related expenses from its Louisiana
operations. This included the amortization of the value of purchased insurance
business relating to Benefit Capital. Amortization of value of purchased
insurance business is expected to continue with respect to our 1999 acquisition
of Great Midwest, but at reduced levels, over the premium-paying life of the
acquired policies. Our cost containment programs helped reduce costs in other
areas as well.
15
Policy benefits decreased 61% from $244,156 to $96,397 for the years
ended December 31, 1999 and December 31, 2000, respectively, as we benefited
from more favorable experience. Policy reserves increased $26,873 for the
comparable periods. Interest expense decreased 77% from $97,402 to $22,838 for
the comparable periods due to a repositioning of assets eliminating most of the
related interest expense. Depreciation and amortization decreased 70% from
$308,803 to $93,431 for the year ended December 31, 1999 and December 31, 2000,
respectively. This decrease was due to the sale of Benefit Capital and the
write-off of goodwill during 1999, which reduced the amount of such assets
subject to ongoing amortization and depreciation. General expenses decreased 34%
from $729,169 to $484,408 as a result of eliminating the Louisiana operations
and the continued success of our cost containment programs.
Losses. We reported a loss before income tax for the year ended
December 31, 2000 of $404,421, compared to a loss before income tax for the year
ended December 31, 1999 of $891,217, a 55% decrease. The decrease was due to an
increase in realized gains on investment securities, recognition of deferred
gains on the sale of property and the elimination of expenses related to Benefit
Capital as well as other expense reductions. Our net loss was $404,421 for the
year ended December 31, 2000, compared to a net loss of $883,679 for the year
ended December 31, 1999, a decrease of 54%. The basic and diluted net loss per
common share decreased to $0.20 per share for the year ended December 31, 2000,
compared to a loss of $0.42 per share for the year ended December 31, 1999.
Liquidity and Capital Resources
Liquidity
Total assets were $6,162,682 at December 30, 2000, compared to
$7,015,821 at December 31, 1999, a decrease of approximately 12%. The decrease
was due to the reduction of certain debt outstanding, and temporary declines in
the value of our investment portfolio.
Total liabilities, including primarily insurance reserves for future
policyholder benefits, were $5,187,382 at December 30, 2000, compared to
$5,999,783 at December 31, 1999, a decrease of approximately 14%. The decrease
was due primarily to repayment of a portion of our outstanding debt and
reduction of outstanding insurance claims.
Total stockholders' equity was $975,300 at December 30, 2000, compared
to $1,016,038 at December 31, 1999, a decrease of approximately 4%. The decrease
was due primarily to an increase in accumulated deficit caused by the net loss
of $404,421, offset by the sale during 2000 of $1,000,000 of our Series B
Convertible Preferred Stock. The investor has paid $350,000 of the total
subscription, with the remaining $650,000 to be received pursuant to a one-year
promissory note. The promissory note accrues interest at the rate of six (6%)
per annum until maturity. Proceeds from the stock sale were used for general
working capital purposes.
The principal requirements for liquidity in connection with our
operations are in contractual obligations to policyowners and annuitants. Our
contractual obligations include payments of surrender benefits, contract
withdrawals, claims under outstanding insurance policies and annuities, and
policy loans. Payment of surrender benefits is a function of "persistency",
which is the extent to which insurance policies are maintained by the
policyowner. Policyowners, at times, do not pay premiums, thus causing their
policies to lapse, or policyowners may choose to surrender their policies for
their cash surrender value. If actual experience of a policy or block of
policies is different from the initial or acquisition date assumptions, a gain
or loss could result. Depending on the nature of the underlying policy, a lapse
or surrender may result in surrender charge revenue or surrender benefit
expense. Such amounts may be less than, or greater than, unamortized acquisition
expenses and/or the related policy reserves; accordingly, current period
earnings may either increase or decrease. Additionally, policy lapses and
surrenders may result in lost future revenues and possible profitability
associated with the policy.
16
Capital Resources
Although we currently have a $150,000 bank line of credit, we fund most
of our activity directly from cash flow from operations and cash flow from
financing activities, which includes deposits to policyholders' account
balances. The line of credit extends to July 2001, with amounts borrowed
thereunder bearing interest at prime plus .5%. At December 31, 2000, $130,000
was outstanding under the line of credit and, as of April 17, 2001, we have
$20,000 available under the credit facility.
On January 13, 1999, we acquired 100% of the outstanding common stock
of GMLIC, a Texas-chartered life insurance company. The total cost of the
acquisition was approximately $939,000. Of the purchase price, cash of $607,000
was paid to seven of eight stockholders with the eighth stockholder receiving a
promissory note for a principal amount of $332,000, payable in three equal
annual installments at an annual interest rate of 6% on the unpaid principal
balance. We partially funded the cash portion of the purchase price with a
$350,000 loan from a bank. The loan accrued interest at an index rate plus .5%,
payable monthly, and originally matured on July 9, 1999, at which time we paid
$100,000 of the principal amount owed and renewed the balance for a six-month
term maturing January 9, 2000. The balance of the loan was paid December 31,
1999 using operating cash flow and the proceeds from the sale of BCLIC. In
addition, as of April 30, 2001, we have paid two of the three installments due
on the promissory note held by the former stockholder.
We have made and intend to make ongoing expenditures in connection with
our subsidiary's marketing programs. Historically, we have funded these
expenditures from cash flow from operations.
We believe that the liquidity resulting from the transactions described
above, together with anticipated cash from continuing operations, should be
sufficient to fund our operations and to make required payments under our credit
facility, the required payments of principal and interest under the 6%
promissory notes payable to a former stockholder of Great Midwest and the annual
10% dividend on the Series A Preferred Stock, for at least the next twelve
months. We may not, however, generate sufficient cash flow for these purposes or
to repay the notes at maturity. Our ability to fund our operations and to make
scheduled principal and interest payments will depend on our future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We believe we will be able to meet our obligations for repayment or
obtain refinancing at reasonable rates, however, there can be no assurance that
we will be able to effect any such refinancing on favorable terms.
BUSINESS
General
Summit Life is a holding company whose subsidiary, Great Midwest,
offers life insurance and annuity products in Oklahoma and Texas. As of December
31, 2000, we had approximately 820 life insurance policies and annuity contracts
outstanding and individual life insurance in force of approximately $14 million.
Our operating strategy is to continue to make acquisitions of small, marginally
profitable or unprofitable insurance companies, consolidate and streamline the
administrative functions of these small companies, improve their investment
yields through active asset management by a centralized investment operation and
eliminate their unprofitable products and distribution channels. Because of
their small size, such companies are often overlooked as potential acquisition
candidates. We believe that we are particularly well suited to make such
acquisitions and to capitalize on the cost savings that can be realized by
consolidating the administrative functions of the acquired companies. We plan to
use a portion of the proceeds of this offering to pursue more small company
acquisitions and purchases of profitable blocks of business.
Since our inception in 1994, we have acquired four life insurance
companies, three of which have been consolidated into Great Midwest. We intend
to continue our strategy of pursuing similar acquisitions of blocks of insurance
business and small insurance companies and other insurance-related
opportunities. We believe that such acquisitions will lower unit costs by
increasing the number of policies and the amount of premiums over which fixed
expenses are spread.
17
We are an Oklahoma corporation; our wholly owned subsidiary, Great
Midwest, is a Texas corporation licensed to do business as an insurance company
in the states of Texas and Oklahoma. Our executive offices are located at 3021
Epperly Drive, Oklahoma City, Oklahoma 73155, and our telephone number is (405)
677-0781.
Operations
Insurance Products
General
Through Great Midwest, we sell a variety of permanent and term life
insurance products, as well as flexible premium and single premium annuities.
Through the sales of these insurance and annuity products, we collect premiums,
which are invested by us in a variety of investments. Our primary objective is
to price each of our products to earn an adequate margin, or spread, between the
return we pay to the policyholder and the return we earn on our investments.
Fixed Rate Annuities
Annuities are long term savings vehicles that are particularly
attractive to customers who are planning for retirement and seek a secure, tax
deferred savings product. The individual annuity business is a growing segment
of the savings and retirement market and among the fastest growing segments of
the life insurance industry. Annuity products currently enjoy an advantage over
certain other retirement savings products, because the payment of federal income
taxes on interest credited on annuity policies is deferred during the investment
accumulation period.
We market, issue and administer a variety of fixed rate deferred
annuity products, including single premium and flexible premium deferred
annuities. In a fixed rate deferred annuity, the insurance company assumes the
risk of interest fluctuations and pays a minimum fixed rate of interest, usually
3% to 4% per year, with an excess amount payable based on investment yields of
its investment portfolio. All of our annuities have a minimum guaranteed
interest rate. Single premium deferred annuities, in general, are savings
vehicles in which the policyholder makes a single premium payment to an
insurance company. We also offer flexible premium deferred annuities in which
the policyholder may elect to make more than one premium payment. Currently, we
do not offer variable annuity products, which differ from fixed annuities in
that the principal value may fluctuate, depending on the performance of assets
allocated pursuant to various investment options chosen by the contract owner.
We periodically establish an interest crediting rate for our new
annuity policies, taking into account such factors as the competitive position
of the company, prevailing market rates and the profitability of the annuity
product. We maintain the initial crediting rate for a minimum period of one
year. Thereafter, we may adjust the crediting rate at our discretion, although
historically such adjustments generally have been made on a quarterly basis. In
establishing renewal crediting rates, we primarily consider the anticipated
yield on our investment portfolio. Interest rates credited on our in force
annuity policies ranged from 5.05% to 8.15% at December 31, 2000. All of our
annuity products have minimum guaranteed crediting rates of 3.0% for the life of
the policy.
Certain of our annuity policies have a "bonus" crediting rate for the
first year of the policy, which typically exceeds the annual crediting rate by
1% to 3%. After the first year, the bonus interest portion of the initial
crediting rate is automatically discontinued, and the renewal crediting rate is
established.
The policyholder is typically permitted to withdraw all or part of the
premium paid plus the accumulated interest credited to his or her account (the
"accumulation value"), subject in virtually all cases to the assessment of a
surrender charge for withdrawals in excess of specified limits. Most of our
traditional annuities provide for penalty-free withdrawals of up to 10 percent
of the accumulation value each year, subject to limitations. Withdrawals in
excess of allowable penalty-free amounts are assessed a surrender charge during
a penalty period which can range anywhere from five years to the term of the
policy, with the majority of such policies being issued with a surrender charge
period of more than seven years. The initial surrender charge is generally 8
percent of the accumulation value and decreases over the penalty period.
18
Tax Qualified Annuities
We also market tax qualified retirement annuities to employees of
public schools and certain other tax exempt organizations. We sell these tax
sheltered annuities, or TSAs as they are called in the insurance industry,
primarily to teachers and other school employees after securing the approval of
a school district, which then generally provides a payroll deduction facility
for premium payments and allows access to the individual teachers. The TSA
products provide for significant penalties for early withdrawal which, when
coupled with the other restrictions of Section 403(b) of the Code (the tax code
section creating TSAs), act to minimize the risk of early surrender.
TSA products tend to be purchased by customers who are younger than
purchasers of our other annuity products. Therefore, our specialty TSA products
tend to incorporate features that are attractive to customers in this younger
age bracket who have longer to accumulate before retirement, such as combining a
competitive crediting interest rate with a longer surrender charge period. TSAs
are attractive to us because TSAs broaden our customer base and provide an
ongoing source of premium renewals. Additionally, because of their tax features
and transfer restrictions, TSAs are less likely to be surrendered, making them a
more stable and dependable source of income for us. In addition to TSAs, we also
sell other tax qualified retirement annuities such as "Individual Retirement
Annuities" and "Simplified Employee Pension Plans." Tax qualified retirement
annuity values totaled almost $1,103,000 or approximately 26% of the total
annuities sold by the Company since inception.
Life Insurance
In addition to annuities, we sell whole life and term insurance. These
products accounted for $153,000 of collected premiums in 2000. Under whole life
policies, the policyholder generally pays a level premium over an agreed period
or the policyholder's lifetime. The annual premium in a whole life policy is
generally higher than the premium for comparable term insurance coverage in the
early years of the policy's life, but is generally lower than the premium for
comparable term insurance coverage in the later years of the policy's life.
These policies combine insurance protection with a savings component that
increases in amount gradually over the life of the policy. The policyholder may
borrow against the savings generally at a rate of interest lower than that
available from other lending sources. The policyholder may also choose to
surrender the policy and receive the accumulated cash value rather than
continuing the insurance protection. Term life products offer pure insurance
protection for a specified period of time; typically 5, 10 or 20 years. Our term
product is designed for and sold to individuals ages 20 through 60 and
terminates at age 70.
Reinsurance
Consistent with the general practice of the life insurance industry, we
reinsure portions of the coverage provided by our insurance products with other
insurance companies under agreements of indemnity reinsurance.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. Indemnity reinsurance does not discharge the original
insurer's primary liability to the insured. While our reinsured business is
ceded to numerous reinsurers, our largest reinsurer accounted for approximately
78% of our total insurance in force at December 31, 2000. We believe the
assuming companies are able to honor all contractual commitments, based on our
periodic reviews of their financial statements, insurance industry reports and
reports filed with state insurance departments.
19
As of December 31, 2000, our policy risk retention limit on the life of
any one individual did not exceed $10,000, while reinsurance ceded by us
represented approximately 80% of gross combined life insurance in force.
Insurance Underwriting
We follow detailed, uniform underwriting practices and procedures in
our insurance business that are designed to assess risks before issuing coverage
to qualified applicants. We have professional underwriters who evaluate policy
applications on the basis of information provided by applicants and others. We
believe that our actual mortality results compare favorably to those of others
in the industry, and that these favorable mortality results are attributable to,
among other things, the geographic location of our customer base, as well as our
consistent application of appropriate underwriting criteria to the processing of
new customer applications.
Mortgage Loan Processing Services
Until 1998, we acted as a broker and performed the marketing and
sourcing functions of loan origination, while the "upstream" companies which
actually fund the mortgage loans performed the underwriting function. In
December 1998, we sold the mortgage services segment to a then officer of our
company.
Medical Receivable Financing
Until 2000, we also provided financing to medical receivable factoring
entities. Medical receivables factoring involves the purchase of accounts
receivable from doctors, hospitals, and other health care organizations. These
accounts receivable are due from major insurance companies, and are purchased by
factoring entities which specialize in the making of such investments, at prices
equal to some discounted percentage of their face amount. Our operations in this
area consisted of making secured loans to these factoring entities, or making
direct purchase of receivables through such entities, which were collateralized
by the medical accounts receivable. We discontinued these operations during
2000.
Investments
Investment activities are an integral part of our business, because
investment income is a significant component of our total revenues. Upon the
purchase by a policyholder of an annuity or life contract and payment of the
premium, the policy is issued and delivered to the new policyholder. The funds
are then invested as we determine based on certain guidelines, including those
set by the NAIC, as to the percentage of investment that is placed in any one
category of investments. Historically, we have invested a majority of our
available assets in securities that are issued, secured, guaranteed or backed by
federal, state or local governments, their agencies or instrumentalities.
Profitability is significantly affected by spreads between interest
yields on investments and rates credited on insurance liabilities. Although all
credited rates on single premium deferred annuities and flexible premium
deferred annuities may be changed at any time after their first year, changes in
credited rates may not be sufficient to maintain targeted investment spreads in
all economic and market environments. In addition, competition and other
factors, including the impact of the level of surrenders and withdrawals, may
limit our ability to adjust or to maintain crediting rates at levels necessary
to avoid narrowing of spreads under certain market conditions. As of December
31, 2000, our average gross yield on invested assets was approximately 7.2% and
the average credited rate was 5.35%.
We balance the duration of our invested assets with the expected
duration of benefit payments arising from insurance liabilities. At December 31,
2000, the adjusted modified duration of debt securities and short-term
investments was 6.8 years and the duration of our insurance liabilities was 7.1
years.
For information regarding the composition and diversification of our
investment portfolio at December 31, 2000, see Note B to our Annual Consolidated
Financial Statements.
20
Acquisitions and Consolidations
General
As previously stated, our operating strategy is to continue to make
acquisitions of small insurance companies or their blocks of business,
consolidate and streamline the administrative functions of these small
companies, improve their investment yields through active asset management by a
centralized investment operation and eliminate their unprofitable products and
distribution channels. Since 1994, we have acquired four life insurance
companies. We intend to continue this strategy of pursuing similar acquisitions,
because we believe that such acquisitions will lower unit costs by increasing
the number of policies and the amount of premiums over which fixed expenses are
spread.
Historical Acquisitions
Our growth to date has been fueled primarily through acquisitions. In
September 1994, we made our first acquisition, of Edmond National Life Insurance
Company, an Oklahoma-domiciled life insurance company. Since then, we have
continued to expand in both territory and product line, now offering annuities
and life insurance in Texas and Oklahoma. Our assets have grown from $1,032,000
in 1994 to approximately $6,163,000 at December 31, 2000. According to A.M. Best
(Best's Statistical Study 2000), in 1999 industry-wide individual annuity
premiums and fund deposits, similar to those we offer, totaled over $67 billion,
and represented approximately 40% of overall premium dollars. We believe that
this niche of the insurance industry will continue to grow as a percentage of
total premium dollars and that this growth, coupled with the current
consolidation of the insurance industry, presents us with good opportunities to
achieve our operating strategy and make profitable acquisitions.
Targeted Future Acquisitions
We have typically sought companies that are underdeveloped, overly
burdened with expenses or owned by financially troubled companies. We believe
that the small insurance company marketplace is highly fragmented and faces
numerous hurdles to its survival and growth over the coming years. Some of those
hurdles include the need for additional capital and surplus due to the changing
regulatory environment and lack of sufficient exit strategies for owners of
small, closely-held companies. We believe that these factors have created
acquisition opportunities often overlooked by the large insurance companies, and
we intend to capitalize on these opportunities as we continue to execute our
growth plans.
Operations and Administration
We have realized relatively low entry costs in our purchases of small
insurance companies. We minimize operating expenses by centralizing,
standardizing and more efficiently performing many functions common to most life
insurance companies. The operations performed by us include underwriting and
policy administration, accounting and financial reporting, marketing, regulatory
compliance, actuarial services and asset management. We believe that we
currently are utilizing less than 10% of our information technology systems
capability in the administration of these back office operations.
Marketing
Our target markets are individuals in the middle and lower income
brackets and small businesses in the states of Oklahoma and Texas. We believe
that this market is severely underserved as more major companies target their
products and agency force toward the upper income and jumbo policy sales. Many
large companies no longer offer insurance in face amounts under $100,000.
Although we do write multi-million dollar policies, our average life policy is
approximately $40,000.
The pricing of our products is generally determined by reference to
actuarial calculations and statistical assumptions principally relating to
mortality, persistency, investment yield assumptions, estimates of expenses and
our judgment as to market and competitive conditions. The premiums and deposits
received, together with assumed investment earnings, are designed to cover
policy benefits, expenses and policyowner dividends plus return a profit to us.
These profits arise from the margin between mortality charges and insurance
benefits paid, the margin between actual investment results and the investment
income credited to policies (either directly or through dividends to
policyowners) and the margin between expense charges and actual expenses. The
level of profits also depends on persistency because policy acquisition costs,
particularly agent commissions, are recovered over the life of the policy.
Interest credited on policies may vary from time to time reflecting changes in
investment, mortality, persistency, expenses and other factors. Interest rate
fluctuations have an effect on investment income and may have an impact on
policyowner behavior. Increased lapses in policies may be experienced if we do
not maintain interest rates that are competitive with other products in the
marketplace.
21
We market our products primarily through small independent property and
casualty agencies and personal producing general agents. James L. Smith and
Charles L. Smith, our founders as well as principal stockholders, also act as
agents for us. James L. Smith and Charles L. Smith are the sole stockholders of
the Smith Agency, which undertakes life insurance and financial planning for
estates, trusts, and corporations and is presently a general agent for several
insurance companies. Additionally, the companies acquired by us generally have
had agents in place who are capable and qualified to generate the sales desired
by us, thereby eliminating part of the expense of recruiting and training a new
agency force.
Competition
The insurance business is highly competitive with numerous companies
offering similar products through comparable marketing and distribution systems.
Companies typically compete for policyholders on the basis of benefits, rates,
financial strength and customer service and compete for agents and brokers on
the basis of commissions, financial strength and customer service. Although we
are smaller than most of our competitors, we provide competitive benefits and
rates. We believe that our ability to administer our operations at a much
reduced rate allows us to maintain low internal cost products.
We have identified additional areas where we have very little
competition due to our size, as well as the size of our targets. That area is
the consolidation field for companies of less than $10 million in total assets.
Our strategy has been to consolidate and streamline the administrative functions
of small life insurance companies. Most large life companies have high fixed
costs when performing acquisitions restricting them in the minimum size of
purchase they can pursue. We believe that the consolidation of the industry will
continue, and we intend to participate in the process.
Governmental Regulation
The federal government does not directly regulate the insurance
business. However, federal legislation and administrative policies in several
areas, including pension regulation, age and sex discrimination, financial
services regulation and federal taxation, do affect the insurance business.
Recently, increased scrutiny has been placed upon the insurance regulatory
framework, and a number of state legislatures have considered or enacted
legislative proposals that alter, and in many cases increase, the authority of
state agencies to regulate insurance companies and holding company systems. In
addition, on November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act, also commonly known as the "Financial Modernization
Act," which significantly modifies the regulation of financial services
companies. The enactment of the Financial Modernization Act, because of its
provisions allowing combinations between insurance companies, banks and other
entities, will undoubtedly result in the federal government assuming a more
direct role in the regulation of the insurance industry. In addition, the
Financial Modernization Act contains privacy provisions relating to the
protection, transfer and use of the nonpublic personal information of consumers.
Consumer privacy laws containing expanded provisions also have been adopted, or
are under consideration, in a number of states.
22
Our insurance subsidiary is subject to regulation and supervision by
the states in which it transacts business, presently Texas and Oklahoma. The
laws of these jurisdictions generally establish agencies with broad regulatory
authority, including powers to: (i) grant and revoke licenses to transact
business; (ii) regulate and supervise trade practices and market conduct; (iii)
establish guaranty associations; (iv) license agents; (v) approve policy forms;
(vi) approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; (x) perform financial, market conduct and other
examinations; (xi) define acceptable accounting principles; (xii) regulate the
type and amount of permitted investments; and (xiii) limit the amount of
dividends and surplus debenture payments that can be paid without obtaining
regulatory approval. As part of their routine regulatory oversight process,
insurance regulatory departments conduct periodic detailed examinations
approximately once every three years of the books, records and accounts of
insurance companies domiciled in their states. These triennial examinations are
generally conducted in cooperation with the departments of two or three other
states, under guidelines promulgated by the NAIC, and Great Midwest is subject
to periodic examinations by state regulatory authorities in accordance with
these provisions. However, we do not expect the results of any such examinations
to have a material effect on our financial condition.
Most states also have enacted legislation that regulate the activities
of insurance holding companies, including acquisitions, extraordinary dividends,
the terms of surplus debentures, affiliate transactions, and other related
matters. Currently, we are registered as a holding company pursuant to such
legislation in Texas and Oklahoma.
Most states have enacted legislation or adopted administrative
regulations that affect the acquisition of control of insurance companies as
well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations vary from state to
state. Most states, however, require administrative approval of: (i) the
acquisition of 10 percent or more of the outstanding shares of an insurance
company incorporated in the state; or (ii) the acquisition of 10 percent or more
of the outstanding stock of an insurance holding company whose insurance
subsidiary is incorporated in the state. The acquisition of 10 percent of such
shares is generally deemed to be the acquisition of control for the purpose of
the holding company statutes. It requires not only the filing of detailed
information concerning the acquiring parties and the plan of acquisition, but
also the receipt of administrative approval prior to the acquisition. In many
states, however, an insurance authority may find that control does not, in fact,
exist in circumstances in which a person owns or controls 10 percent or a
greater amount of securities.
Under the solvency or guaranty laws of the states in which we do
business, our insurance subsidiary also may be required to pay assessments (up
to certain prescribed limits) to fund policyholder losses or the liabilities of
insolvent or rehabilitated insurance companies. These assessments may be
deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength. In certain instances, the assessments may be
offset against future premium taxes. Although we have not been required to pay
assessments in any significant amounts, the likelihood and amount of any future
assessments cannot be estimated, as they are beyond our control.
State insurance regulators and the NAIC are continually re-examining
existing laws and regulations and their application to insurance companies. From
time to time the NAIC has adopted, and recommended to the states for adoption
and implementation, several regulatory initiatives designed to decrease the risk
of insolvency of insurance companies in general. These initiatives include
risk-based capital requirements for determining the levels of capital and
surplus an insurer must maintain in relation to its insurance and investment
risks. The NAIC regulatory initiatives also impose restrictions on an insurance
company's ability to pay dividends to its stockholders. These initiatives may be
adopted by the various states in which we are licensed, but the ultimate content
and timing of any statutes and regulations to be adopted by the states cannot be
determined at this time. We cannot predict with certainty the effect that any
proposals, if adopted, or legislative developments could have on our insurance
businesses and operations.
23
Federal Income Taxation
The annuity and life insurance products that we sell generally provide
the policyholder with an income tax advantage, as compared to other saving
investments such as certificates of deposit and bonds, in that income taxation
on the increase in value of the product is deferred until receipt by the
policyholder. Annuity benefits and life insurance benefits that accrue prior to
the death of the policyholder are generally not taxable until paid. Life
insurance death benefits are generally exempt from income tax, but not estate
tax. Also, benefits received on immediate annuities (other than structured
settlements) are recognized as taxable income ratably as opposed to economic
accrual methods that may be required to be used for other investments, which
tend to accelerate taxable income into earlier years. The tax advantage for
annuities and life insurance is provided in the Code, and is generally followed
in all states and other United States taxing jurisdictions. This favorable tax
treatment may give our annuity policies a competitive advantage over other
retirement products that do not offer this benefit. To the extent that the Code
may be revised to eliminate or reduce the tax deferred status of life deferred
payment annuity products, or to establish a tax deferred status to any competing
policies, our competitive advantage may be adversely affected.
Additionally, our insurance company subsidiary is taxed under the life
insurance company provisions of the Code. Provisions in the Code require a
portion of the expenses incurred in selling insurance products to be deducted
over a period of years, as opposed to immediate deduction in the year incurred.
This provision increases the tax for statutory accounting purposes, which
reduces statutory surplus and, accordingly, decreases the amount of cash
dividends that may be paid by our life insurance subsidiary.
Facilities
Our administrative, marketing and production facilities consist of
approximately 3,000 square feet at a single location in Oklahoma City, Oklahoma.
We own this facility and the approximate 30,000 square feet of raw land adjacent
to the property. This facility will provide room for possible expansion, which
will likely be utilized within the next few years.
Employees
As of the date of this prospectus, we have five employees, most of
which perform both managerial duties and administrative functions. We expect
that we will need more employees as the size of our business grows. None of our
employees are represented by a labor union. We believe that our relations with
our employees are good. Our employees also perform services for Great Midwest.
Legal Proceedings
We are involved from time to time in various legal proceedings and
claims incident to the normal conduct of our business. However, we believe that
such legal proceedings and claims, individually and in the aggregate, are not
likely to have a material adverse effect on our financial condition or results
of operations.
24
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, and their ages as of the date of
this prospectus, are as follows:
Name Age Position
---- --- --------
James L. Smith......... 62 Chairman of the Board of Directors and Chief
Executive Officer
Charles L. Smith....... 42 President, Chief Operating Officer and Director
Quinton L. Hiebert..... 42 Vice President, Chief Financial Officer and
Secretary
Dean Brown............. 76 Director
Thomas D. Sanders...... 61 Director
Gary L. Ellis.......... 57 Director
James L. Smith has served as our Chairman of the Board, President and
Chief Executive Officer from our inception in 1994 until April 1998, at which
time he was elected Chairman of the Board and Chief Executive Officer. Mr. Smith
has served as Chairman of the Board and President of the Smith Agency, an
Oklahoma licensed insurance agency since 1980. Mr. Smith earned the designation
of Chartered Life Underwriter and Chartered Financial Consultant from the
American College in Bryn Mwar, Pennsylvania. Mr. Smith is also registered with
the NASD as a registered representative. Mr. Smith is the father of Charles L.
Smith.
Charles L. Smith has served as our Director, Vice President, Secretary
and Treasurer from our inception in 1994 until April 1998, at which time he was
elected President, Chief Operating Officer and a director. Mr. Smith also serves
as President of Great Midwest Life Insurance Company, the Company's wholly owned
subsidiary. Mr. Smith served as Chairman and President of Charles L. Smith and
Associates, Inc. from 1989 until April 1994, when it merged with the Smith
Agency. Mr. Smith is Vice President and a director of the Smith Agency. Mr.
Smith has been involved in the insurance industry for over 17 years. Mr. Smith
is the son of James L. Smith.
Quinton L. Hiebert has been employed by us since March 1996, and was
elected as our Vice President, Chief Financial Officer and Secretary in April
1998. From October 1989 to March 1996, he was employed as Chief Financial
Analyst at the Oklahoma Department of Insurance. Mr. Hiebert holds a bachelors
degree from Bethel College, Kansas and earned his MBA from Emporia State
University, Kansas. Mr. Hiebert is also a Certified Public Accountant.
M. Dean Brown has served as a director of Summit Life Corporation since
April 1997. Prior to Mr. Brown's retirement in December 1997, he practiced law
at the law firm of Green, Brown and Stark, an Oklahoma City law firm. He holds a
bachelors degree from the University of Oklahoma and earned his Juris Doctor
from Oklahoma City University. Mr. Brown is also a Certified Public Accountant.
Thomas D. Sanders has served as a director of Summit Life Corporation
since April 1997. He served as the Executive Vice President of Marketing for the
Lomas Life Group from 1986 to 1990 and as Executive Vice President for Union
Life Insurance Company between 1978 and 1990. Mr. Sanders currently serves as
Chief Executive Officer and Director of ReUnion Marketing, Inc. He is a graduate
of Oklahoma State University.
Gary L. Ellis has, since 1994, served Summit Life in several positions.
From 1994 until 1997, he served variously as Vice President and President of
Equity Mortgage Services, Inc., a wholly owned subsidiary of Summit Life until
its merger with us in late 1997. Subsequent to the Equity Mortgage merger, Mr.
Ellis was appointed Vice President-Mortgage Operations. Since 1988, Mr. Ellis
has also owned and operated Gary L. Ellis & Associates, which provides tax and
accounting services. Mr. Ellis graduated from Oklahoma University with a
bachelors degree.
25
Directors' Terms
The Board of Directors is divided into three classes, each of whose
members will serve for a staggered three-year term. Upon the expiration of the
term of a class of directors, directors in such class will be elected for
three-year terms at the annual meeting of shareholders in the year in which such
term expires.
Committees of the Board of Directors
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee's functions include: (i) reviewing and
recommending to the Board of Directors (subject to stockholder approval) the
independent auditors selected to audit our financial statements, including the
review and approval of the fees charged for all services by the independent
auditors; (ii) reviewing the scope of the annual audit plan; (iii) reviewing our
audited financial statements; (iv) reviewing the management letter comments from
our independent auditors, including management's responses and plans of action;
(v) reviewing from time to time our general policies and procedures with respect
to auditing, accounting and the application of resources; (vi) reviewing any
other matters and making special inquiries and investigations referred to it by
the Board of Directors; and (vii) making other recommendations to the Board of
Directors as the committee may deem appropriate. The members of the Audit
Committee are James L. Smith, M. Dean Brown and Thomas D. Sanders.
The Compensation Committee's functions include determining base
salaries, annual incentive bonus awards and other compensation awards to the
executive officers of Summit Life Corporation. Bonus amounts earned are based on
the attainment of budgeted performance and asset quality goals, as determined by
an objective review of the degree of attainment of such goals, as well as both
an objective and subjective review of the respective executive officer's
contribution thereto. Individual goals are established by the Board of Directors
in consultation with each executive. Mr. James L. Smith serves as Chairman of
the Compensation Committee, and Messers Brown and Sanders comprise the remaining
committee members. The Company intends to maintain at least two independent,
nonaffiliated directors on its Board.
Director Compensation
Each member of the Board of Directors is paid an annual stipend of
$1,200 and a fee of $100 for each Board of Directors meeting attended. All
directors will receive reimbursement of reasonable expenses incurred in
attending Board and Committee meetings and otherwise carrying out their duties.
Executive Compensation
The following table sets forth the total compensation of our Chief
Executive Officer for the last three fiscal years. No officer or director of
Summit Life Corporation received, during any of such periods, total compensation
in excess of $100,000.
Annual Compensation
-------------------
Name and Principal Position Year Salary Other
--------------------------- ---- ------ -----
James L. Smith, Chairman of the Board and Chief Executive Officer 2000 $12,000 $3,431 (1)
1999 $12,000 $3,326 (1)
1998 12,000 4,410 (1)
(1) Represents compensation attributable to Mr. Smith in connection with
country club dues paid by us for the benefit of Mr. Smith.
26
Stock Options Granted in Fiscal 2000
We do not have a stock option plan, nor have any stock options been
granted by us outside a plan.
Employment Agreements
In April 1997, we entered into employment agreements with James L.
Smith and Charles L. Smith, our Chief Executive Officer and President,
respectively. The employment agreements provide, among other things, for
six-year terms, base and maximum salaries, salary increases subject to Board of
Directors approval, annual bonuses and benefits. For 2000, the Board of
Directors approved base salaries to James L. Smith of $12,000, and to Charles L.
Smith of $72,000. The amount of any bonus compensation payable to James L. Smith
or Charles L. Smith is determined by the Compensation Committee of the Board of
Directors, in accordance with criteria set by such committee; no bonus
compensation was granted for 2000.
The agreements may be terminated by mutual agreement, by Summit Life
Corporation at its sole discretion without cause, or by Summit Life Corporation
for cause, as defined. If the agreements are terminated for cause, severance
payments of $50,000 are payable to each employee. If the agreements are
terminated without cause, severance payments to each employee will be equivalent
to the maximum salary over the term of the agreement less amounts previously
paid, but not less than $360,000 for Charles L. Smith and $450,000 for James L.
Smith.
CERTAIN TRANSACTIONS
Both James L. Smith and Charles L. Smith, as the original founders of
Summit Life, are considered "promoters" under the Securities Act of 1933. We
believe that any transactions entered into between us and these individuals have
been on terms no less favorable to us as those generally available from
unaffiliated third parties. All such transactions have been unanimously approved
by our board of directors which, during 2000, included two independent,
nonaffiliated directors. Such independent directors did not have any interest in
the transactions approved and had access, at our expense, to our legal counsel
or independent legal counsel. All future affiliated transactions and loans will
be made or entered into on terms that are no less favorable to us than those
that can be obtained from unaffiliated third parties and, in any event, must be
approved by a majority of our independent directors who do not have any interest
in the transactions approved and who have access, at our expense, to our legal
counsel or independent legal counsel.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our Common Stock as of April 17, 2001, and as adjusted
to reflect the sale of the minimum and maximum number of shares of Common Stock
offered by us, as to:
o each person known by us to beneficially own more than 5% of
our outstanding Common Stock;
o each of our directors;
o each of our executive officers named in the table under the
heading "MANAGEMENT - Executive Compensation"; and
o all of our directors and executive officers as a group.
Except as otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to all shares of Common Stock
held by them. Beneficial ownership is determined in accordance with the rules
and regulations of the Securities Exchange Commission. The number of shares
beneficially owned by a person includes shares of Common Stock subject to
conversion privileges held by that person that are currently exercisable or
exercisable within 60 days after the date of this prospectus. Shares issuable
pursuant to such conversion privileges are deemed outstanding for purposes of
computing the percentage of ownership of the person holding such conversion
privileges and for all officers and directors as a group, but are not deemed
outstanding in computing the percentage of any other person.
27
Applicable percentage ownership in the following table is based on
2,267,605 shares of common stock outstanding as of April 17, 2001.
Percent of Class Beneficially Owned
-----------------------------------
After Offering
------------------
Name and Address Shares
of Beneficial Holder(1) Beneficially Owned Prior to Offering Minimum Maximum
----------------------- ------------------ ----------------- ------- -------
James L. Smith* 693,485 30.58% 28.10 21.22%
Charles L. Smith* 691,735 30.51% 28.03 21.17%
Dean Brown* 100,963 4.45% 4.09% 3.09%
Quinton L. Hiebert 5,350(3) (2) (2) (2)
Thomas D. Sanders* 2,318 (2) (2) (2)
Gary L. Ellis* 1,532 (2) (2) (2)
All executive officers and
directors as a group (6 persons) 1,495,383 65.95% 60.60% 45.76%
-------------------------------
* Director
(1) Address is c/o Summit Life Corporation, 3021 Epperly Drive, P.O. Box
15808, Oklahoma City, Oklahoma 73155.
(2) Less than 1%.
(3) Mr. Hiebert holds 4,975 shares as Trustee of the Quinton and Samelia
Hiebert Revocable Trust and holds 375 shares in his Individual
Retirement Account.
DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation was amended in September of 1998. The
amendment eliminated the Class B common stock and redesignated the Class A
common stock as, simply, "common stock." The amendment also lowered the par
value of the common stock from $.50 to $.01 per share while increasing the
number of authorized shares of common stock from 2,000,000 to 5,000,000.
Additionally, our certificate of incorporation was further amended to create a
new class of preferred stock. Following the amendment, our authorized capital
stock included (a) 5,000,000 shares of common stock having a par value of $.01
per share, and (b) 5,000,000 shares of preferred stock having a par value of
$.001 per share. Prior to this offering 2,267,605 shares of common stock were
issued and outstanding and 1,005,000 shares of preferred stock were issued and
outstanding. As of April 17, 2001, we have approximately 1,424 stockholders of
record of the common stock.
28
Common Stock
Holders of common stock are entitled to one vote per share on all
matters to be voted on by shareholders. Subject to any preference granted to
holders of any outstanding preferred stock, holders of common stock are entitled
to receive such dividends, if any, as may be declared by the board of directors
out of funds legally available for the payment of such dividends. Should we
liquidate, dissolve or wind up, following the payment of all debts and other
liabilities and subject to the prior rights of holders of any class of preferred
stock, holders of common stock are entitled to share ratably in all assets
legally available for distribution. Holders of common stock have no cumulative
voting, preemptive, subscription, redemption or conversion rights. Additionally,
the rights, preferences and privileges of holders of common stock are subject to
the rights of holders of shares of any series of preferred stock that has been
issued and may be issued in the future.
On January 11, 1999, a registration statement relating to the initial
public offering of 1,000,000 shares of our common stock was declared effective
by the Securities and Exchange Commission. The initial public offering price was
$5.00 per share, and the minimum purchase per subscriber was 100 shares. The
offering was closed on June 30, 1999, resulting in the issuance of 163,770
shares of our common stock and gross proceeds of $818,850. We used the proceeds
of our initial public offering primarily to fund acquisitions, repay debt and
for working capital and general corporate purposes.
Preferred Stock
Our certificate of incorporation authorizes our board of directors,
from time to time, to issue shares of preferred stock in one or more series.
They may establish the designations, voting powers, if any, preferences and
relative, participating, optional or other special rights, of the shares of each
such series and any qualifications, limitations and restrictions on preferred
shares. Shares of preferred stock may be issued for any general corporate
purpose, including acquisitions and financing. The board of directors may issue
one or more series of preferred stock with rights more favorable with regard to
voting, dividends and liquidation than the rights of holders of common stock.
Issuance of a series of preferred stock also could be used for the purpose of
discouraging, delaying or preventing a change in control of Summit Life. No
preferred stock will be issued to officers, directors or other affiliates,
including any 5% holders of common stock, except on the same terms and
conditions offered to nonaffiliated persons.
On April 23, 1999, our board of directors approved the issuance of
5,000 shares of nonvoting Series A preferred stock. The Series A preferred stock
provides for annual dividends of 10% which are cumulative and for a liquidation
preference of $100 per share. The Series A preferred stock is not redeemable and
it ranks senior to the common stock.
On September 29, 2000, our board of directors approved the issuance of
1,000,000 shares of nonvoting Series B preferred stock. The Series B preferred
stock provides for such dividends, if any, as may be declared by the board of
directors pursuant to law, which shall be noncumulative. As long as any shares
of the Series B preferred stock are outstanding, the Series B preferred stock
will rank senior to the common stock as to the payment of dividends and
distribution upon liquidation, winding-up and dissolution. Additionally, the
Series B preferred stock will rank junior to the Series A preferred stock with
respect to the payment of dividends and equal with the Series A preferred stock
with respect to the payment of distributions upon liquidation, winding-up and
dissolution.
The Series B preferred stock that was issued subject to a promissory
note is redeemable, in whole or in part, at our option at any time after a
default by the Series B preferred stockholder of his repayment obligation under
the promissory note. Each share of Series B preferred stock may be converted, at
any time after March 31, 2003, into fully paid and nonassessable whole shares of
common stock on a 1-for-1 basis, subject to the conditions of the Certificate of
Designation of Series B Convertible Preferred Stock.
29
Certain Anti-Takeover Provisions
Provisions of our certificate of incorporation and bylaws may be deemed
to have anti-takeover effects and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
Classified Board. Our certificate of incorporation and bylaws provide
that the board of directors will be divided into three classes serving staggered
three-year terms, with each class to be as nearly equal in number as possible.
Currently, James L. Smith and M. Dean Brown serve as Class 2 directors, whose
terms expire at the 2001 annual meeting. Charles L. Smith and Thomas D. Sanders
serve as Class 1 directors, whose terms expire at the 2002 annual meeting. Gary
L. Ellis serves as Class 3 director, whose term expires at the 2003 annual
meeting. This staggered classification of the board of directors may have the
effect of delaying or preventing changes in control and management.
Board of Directors Vacancies. Our certificate of incorporation
authorizes the board of directors to fill vacant directorships or increase the
size of the board of directors. This may deter a shareholder from removing
incumbent directors and simultaneously gaining control of the board of directors
by filling the vacancies created by such removal with its own nominees.
No Stockholder Action by Written Consent; Special Meetings. Our
certificate of incorporation and bylaws further provide that stockholders may
only take action at an annual or special meeting of the stockholders and
stockholders may not take action by written consent, unless taking such action
by written consent has been approved in advance by the board of directors.
Special meetings of stockholders may only be held following a resolution of the
board of directors.
Amendments to Our Certificate of Incorporation and Bylaws. The
provisions of our certificate of incorporation governing the attributes of our
authorized stock, amendments to the certificate of incorporation and bylaws, the
composition of the board of directors and indemnification of our directors and
officers may not be amended, except in the manner from time to time prescribed
by the laws of the State of Oklahoma. In addition, our bylaws may not be amended
without the vote of 66-2/3% of our outstanding voting stock.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of the stockholders, or to nominate candidates for
election as directors at an annual meeting of the stockholders, must provide
timely notice prior to the meeting at which the matters are the be acted upon or
directors are the be elected. To be timely, a stockholder's notice must be given
in writing to our secretary and received at our principal executive offices not
less than 40 days prior to the meeting, provided that if less than 45 days
remain until the meeting, notice be given five days after notice of the meeting
is given but not less than five days prior to the meeting with regard to
stockholder proposals, and 10 days after notice of the meeting is given with
regard to director nominations. This advance notice procedure does not apply to
nomination of candidates for election as directors by or at the direction of our
board of directors or a committee of the board.
Notice to Summit Life from a stockholder who proposes to nominate a
person at a meeting for election as a director must contain all information
about that person as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee including the
person's written consent to serve as a director, if so elected, and certain
information about the stockholder proposing to nominate that person. Stockholder
proposals must also include certain specified information.
These limitations on stockholder proposals do not restrict a
stockholder's right to include proposals in our annual proxy materials pursuant
to rules promulgated under the Securities Exchange Act of 1934, as amended.
Oklahoma Takeover Statute. We are subject to Section 1090.3 of the
Oklahoma General Corporation Act. In general, Section 1090.3 prevents an
"interested stockholder" from engaging in a "business combination" with an
Oklahoma corporation for three years following the date that person became an
interested stockholder, unless:
30
o prior to the date such person became an interested
stockholder, our board of directors approved the transaction
in which the interested stockholder became an interested
stockholder or approved the business combination;
o upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of our voting stock
outstanding at the time the transaction commenced, excluding
stock held by directors who are also officers of the
corporation and stock held by certain employee stock plans; or
o on or subsequent to the date of the transaction in which such
person became an interested stockholder; the business
combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the
interested stockholder.
Section 1090.3 defines a "business combination" to include:
o any merger or consolidation involving the corporation and an
interested stockholder;
o any sale, transfer, pledge or other disposition involving an
interested stockholder of 10% of more of the assets of the
corporation;
o subject to certain exceptions, any transaction which results
in the issuance or transfer by the corporation of any stock of
the corporation to an interested stockholder;
o any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the
interested stockholder; or
o the receipt by an interested stockholder of any loans,
guarantees, pledges or other financial benefits provided by or
through the corporation.
For the purposes of Section 1090.3 the "corporation" also includes our
majority-owned subsidiaries. In addition, Section 1090.3 defines an "interested
stockholder" as an entity or person beneficially owning 15% or more of our
outstanding voting stock and any entity or person affiliated with or controlling
or controlled by such entity or person. The effect of Section 1090.3 may be to
discourage certain types of transactions involving an actual or potential change
in control of Summit Life.
Transfer Agent and Registrar
UMB Bank, N.A. serves as the transfer agent and registrar for our
common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, and assuming the maximum number of
shares offered is sold, we will have 3,267,605 shares of common stock
outstanding. Of these shares, all of the 1,000,000 shares sold in the offering
(assuming the maximum number of shares offered is sold) will be freely
transferable without restriction or further registration under the Securities
Act of 1933. Of the remaining amount of shares outstanding, 163,770 shares were
purchased in our initial public offering in 1999 and are freely tradable, with
the balance eligible for public sale without registration pursuant to Rule 144.
31
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who beneficially owns restricted securities
for at least one year, including the holding period of any prior owner except an
affiliate, would be generally entitled to sell within any three month period a
number of shares that does not exceed the greater of (i) 1% of the number of
then outstanding shares of the common stock or (ii) the average weekly trading
volume of the common stock in the public market during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to manner of sale
provisions, notice requirements and the availability of current public
information about the company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the company at any
time during the three months preceding a sale, and who has beneficially owned
shares for at least two years (including any period of ownership of preceding
nonaffiliated holders), would be entitled to sell shares under Rule 144(k)
without regard to the volume limitations, manner-of-sale provisions, public
information requirements or notice requirements.
In connection with our initial public offering in 1999, James L. Smith
and Charles L. Smith were required to enter into a Promotional Share Lock-In
Agreement with the State of Oklahoma, pursuant to which 658,185 shares of our
common stock held by James L. Smith and 658,185 shares of our common stock held
by Charles L. Smith (the "Promotional Shares") may not be released for sale
until one year from the termination date of the offering, or June 30, 2000.
After such date, the Promotional Shares may be released in quarterly increments
of 2.5% per quarter, with the remainder of the Promotional Shares available for
sale on the second anniversary of the termination of the initial public
offering, June 30, 2001.
PLAN OF DISTRIBUTION
General
We will sell shares of our common stock according to this prospectus
directly to any and all suitable investors in approved states in which these
securities are registered or are exempt from registration. Currently, the common
stock has not been registered for sale in any states other than Oklahoma and
Louisiana. This is a self-underwritten offering with a minimum offering amount
of 200,000 shares and a maximum of 1,000,000 shares at a price of $1.00 per
share.
Shares of the common stock will be marketed through Charles L. Smith,
our president, who will not receive any commissions or other form of
remuneration based on the sale of the shares. After the minimum offering is
sold, we may enter into an agency agreement with one or more registered
broker-dealers or registered sales agents for the sale of shares, in which event
we may pay participating registered broker-dealers or registered sales agents
commissions of up to 6% of the offering price of shares actually sold by them.
However, we have no agreements with anyone to pay any such fees or commissions,
and in no event will we utilize any broker-dealers or agents until at least the
minimum offering is sold. In order to purchase shares in this offering, you must
subscribe to purchase a minimum of at least 100 shares, unless in our sole
discretion, we decide to accept a subscription for a lesser number of shares. We
have set no maximum purchase amount.
This offering will commence on the date of this prospectus and continue
until midnight, Oklahoma City, Oklahoma time, on _____________, 2002. If the
minimum number of shares is sold, we may terminate the offering at any time and
at less than the maximum offering. However, in no event will the offering extend
beyond _____________, 2002. See "Conditions to the Offering and Release of
Funds" below.
Following our acceptance, subscriptions are binding on subscribers and
may not be revoked by the subscriber except with our consent. We reserve the
right to cancel an accepted subscription at any time and for any reason until
the proceeds of the offering are released from escrow or, in our sole
discretion, reject, in whole or in part, any subscription. Additionally, we may,
in our sole discretion, allocate shares of common stock among subscribers in the
event of an over-subscription of the shares to be offered in this offering.
32
Certificates for the shares purchased will be issued and distributed,
as soon as practicable after subscription funds are released to Summit Life
Corporation from the subscription escrow account.
Conditions to the Offering and Release of Funds
Subscription proceeds, accepted by Summit Life Corporation, for the
first 200,000 shares subscribed for in the offering will be promptly deposited
in an escrow account with UMB Oklahoma Bank, National Association, Oklahoma
City, Oklahoma, as escrow agent, until the conditions to the offering have been
satisfied or the offering has been otherwise terminated. The offering will be
terminated, no shares will be issued and no subscription proceeds will be
released to us from escrow unless on or before ___________, 2002, we have
accepted subscriptions and payment in full for an aggregate of at least 200,000
shares. If a minimum of at least 200,000 shares has not been sold by
___________, 2002,we will promptly return all investors' funds, with interest.
Interest on subscriptions is not otherwise payable. Any subscription proceeds we
accept after we have accepted subscriptions for the initial 200,000 shares, but
before this offering is terminated, will not be deposited in the escrow account
but will be available for immediate use by Summit Life Corporation. If the
minimum number of shares is sold, we may thereafter terminate the offering at
any time and at less than the maximum offering. In no event, however, will the
offering extend beyond ___________, 2002.
The escrow agent has not investigated the desirability or advisability
of an investment in shares of common stock by prospective investors and has not
approved, endorsed or passed upon the merits of an investment in such shares. We
may direct the escrow agent to invest subscription funds held in escrow in
short-term United States Treasury securities, banker's acceptances, federal
funds, insured or fully collateralized certificates of deposit and/or insured
money market accounts, including those of the escrow agent, until released from
escrow. In no event will the subscription proceeds held in escrow be invested in
instruments that would mature after the termination of the offering. Our
management presently expects that all subscription funds held in escrow will be
invested in short-term United States Treasury securities.
How to Subscribe
Subscriptions to purchase shares of common stock can be made by
completing the subscription agreement attached to this prospectus and mailing
the same, with first class mail postage prepaid, to Summit Life Corporation,
P.O. Box 15808, Oklahoma City, Oklahoma 73155 or delivering the same to Summit
Life Corporation, 3021 Epperly Drive, Oklahoma City, Oklahoma 73155. Full
payment of the purchase price must accompany the subscription. Unless otherwise
agreed, all subscription amounts must be made in United States dollars by cash,
check, bank draft or money order payable to "Summit Life Corporation," in the
amount of $1.00 multiplied by the number of shares subscribed for. Subscribers
should retain a copy of the completed subscription agreement and form of payment
for their records. Any subscriber who intends to purchase shares through a
self-directed retirement plan should contact Summit Life Corporation at (405)
677-0781 for directions as to how to subscribe and pay for shares.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, as well as proxy
statements and other information with the SEC. You may read and copy any
document we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 or at its Regional Offices in Chicago,
Illinois or New York, New York. You may obtain further information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our
SEC filings are also available to the public over the Internet at the SEC's web
site at http://www.sec.gov, which contains reports, proxy statements and other
information regarding registrants like us that file electronically with the SEC.
33
This prospectus is part of a registration statement on Form SB-2 filed
by us with the SEC under the Securities Act. As permitted by SEC rules, this
prospectus does not contain all of the information included in the registration
statement and the accompanying exhibits filed with the SEC. You may refer to the
registration statement and its exhibits for more information. Copies of the
registration statement may be inspected, without charge, at the offices of the
SEC, or obtained at prescribed rates from the Public Reference Section of the
SEC at the address set forth above.
You should rely only on the information provided in this prospectus. We
have not authorized anyone to provide you with different information. You should
not assume that the information in this prospectus is accurate as of any date
other than the date on the cover of the prospectus. We are not making this offer
of securities in any state or country in which this offer or the acceptance
thereof would not be in compliance with the securities or blue sky laws of such
jurisdiction.
LEGAL OPINIONS
Day, Edwards, Propester & Christensen, P.C., Oklahoma City, Oklahoma
will pass upon the validity of the securities.
EXPERTS
Our financial statements as of and for the years ended December 31,
1999 and 2000 have been included in this prospectus and registration statement
in reliance upon the report of Grant Thornton LLP, independent certified public
accountants, given on the authority of this firm as experts in accounting and
auditing.
34
SUMMIT LIFE CORPORATION
REGISTRATION STATEMENT ON FORM SB-2
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 1006(B)(7) of the General Corporation Act of the State of
Oklahoma (the "OGCA") authorizes a corporation in its certificate of
incorporation to eliminate or limit the personal liability of members of its
board of directors to the corporation or its stockholders for monetary damages
for violations of a director's fiduciary duty of care, including acts
constituting gross negligence. Such a provision would have no effect on the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. In addition, no such provision may eliminate or limit
the liability of a director for breaching his duty of loyalty to the corporation
or its shareholders, failing to act in good faith, engaging in intentional
misconduct or knowingly violating a law, paying an unlawful dividend or
approving an illegal stock repurchase, or executing any transaction from which
the director obtained an improper personal benefit.
Section 1031 of the OGCA empowers a corporation to indemnify any person
who was or is a party to or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. With respect to actions or suits by or in the right of the
corporation, such indemnification is limited to expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit. Further, no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Additionally, a
corporation is required to indemnify its directors and officers against expenses
to the extent that such directors or officers have been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to above or
in defense of any claim, issue or matter therein.
An indemnification can be made by the corporation only upon a
determination made in the manner prescribed by the statute that indemnification
is proper in the circumstances because the party seeking indemnification has met
the applicable standard of conduct as set forth in the OGCA. The indemnification
provided by the OGCA shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors, or otherwise. A corporation also has
the power to purchase and maintain insurance on behalf of any person covering
any liability incurred by such person in his capacity as a director, officer,
employee or agent of the corporation, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability. The indemnification provided by the OGCA shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
II-1
The Registrant's Charter and Bylaw Provisions
The Registrant's First Amended and Restated Certificate of
Incorporation (i) limits its directors' liability for monetary damages to the
Registrant and its shareholders for breach of fiduciary duty except under the
circumstances outlined in Section 1006(B)(7) of the OGCA as described above,
(ii) provides for elimination or limitation of liability to the fullest extent
permitted should the OGCA be amended to authorize corporation action further
eliminating or limiting the personal liability of directors and (iii) provides
for indemnification to the fullest extent permitted by Section 1031 of the OGCA.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered. All expenses of
registration of the Shares will be borne by the Company. All of the amounts
shown are estimates, except the registration fee.
Securities and Exchange Commission registration fee... $ 250.00
Legal fees and expenses............................... $40,000.00
Accounting fees and expenses.......................... $30,000.00
Printing and engraving expenses....................... $25,000.00
Blue sky fees and expenses............................ $ 4,750.00
----------
TOTAL EXPENSES $100,000.00
===========
Item 26. Recent Sales of Unregistered Securities.
The following sets forth certain information regarding sales of
securities of the Company issued within the past three years, which were not
registered pursuant to the Securities Act of 1933, as amended (the "Securities
Act").
On January 13, 1998, pursuant to the terms of that certain acquisition
agreement between the Company and Benefit Capital Life Investment Corporation, a
Louisiana corporation, the Company issued 100,000 shares of common stock for all
of the issued and outstanding stock of BCLIC. It is the Company's belief that
Benefit Capital Life Investment Corporation was a "sophisticated investor"
within the meaning of Section 4(2) of the Securities Act and that, pursuant to
the negotiations by which BCLIC was acquired by the Company, it had access to
information regarding the Company and the proposed transaction.
In February 1998, the following directors, as compensation for services
rendered to the Company, were issued the following shares of common stock: (i)
462 shares to Dean Brown; (ii) 962 to Gary Ellis; (iii) 962 to Thomas Sanders;
(iv) 500 to Gary Skibicki; (v) 961 to Charles L. Smith; and (vi) 961 to James L.
Smith. No sales commissions were paid in connection with such issuances. In
April 1998, the following directors, as compensation for services rendered to
the Company, were issued the following shares of common stock: (i) 500 shares to
Dean Brown; (ii) 570 to Gary Ellis; (iii) 1,355 to Thomas Sanders; (iv) 570 to
Gary Skibicki; (v) 1,392 to Charles L. Smith; (vi) 1,393 to James L. Smith;
(vii) 820 to Randal Beach; and (viii) 285 to Russell Graham. The securities were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act.
In April 1998, pursuant to the provisions of the convertible debentures
of the Company held by Quinton Hiebert, an executive officer of the Company, Mr.
Hiebert was issued 3,000 shares of common stock. No sales commissions were paid
in connection with such issuance. The securities were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
II-2
In April 1998, in lieu of commissions payable, an agent received 262
shares of common stock. No sales commissions were paid in connection with such
issuance. The securities were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
In April of 1999, the Company issued 4,892 shares of a newly created
class of preferred stock, resulting in gross proceeds of approximately $489,200.
In October 1999, the Company issued an additional 108 shares of preferred stock,
resulting in gross proceeds to the Company of $10,800. It is the Company's
belief that each of the individuals to whom the preferred stock was issued was a
"sophisticated investor" within the meaning of Section 4(2) of the Securities
Act and that each such investor had access to information regarding the Company
and the proposed transaction. No sales commissions were paid in connection with
the sale of the preferred stock and the securities were issued in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act.
On September 30, 2000, the Company issued 1,000,000 shares of a newly
created class of Series B Convertible Preferred Stock to an accredited investor
for an aggregate consideration of $1,000,000. The Company has collected $350,000
of the aggregate consideration, with the remaining $650,000 of the purchase
price to be paid to the Company pursuant to a one-year promissory note. The
promissory note accrues interest at the rate of six percent (6%) per annum until
maturity. No sales commissions were paid in connection with the sale of the
Series B Convertible Preferred stock and the securities were issued in reliance
on the exemption from registration provided by Section 4(2) and Rule 506 of
Regulation D of the Securities Act of 1933. Each share of the Series B
Convertible Preferred Stock may be converted, at any time after March 31, 2003,
into fully paid and nonassessable whole shares of the Company's common stock on
a 1-for-1 basis, subject to the conditions of the Certificate of Designation of
Series B Convertible Preferred Stock.
II-3
Item 27. Exhibits.
Name of Exhibit
Exhibit ---------------
Number
------
3.1* First Amended and Restated Certificate of Incorporation (filed
as Exhibit 3.1 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by
reference)
3.2* First Amended and Restated Bylaws (filed as Exhibit 3.2 to the
Company's Registration Statement on Form SB-2, file number
333-65097 and incorporated herein by reference)
4.1* Specimen Certificate of the Common Stock (filed as Exhibit 4.1
to the Company's Registration Statement on Form SB-2, file
number 333-65097 and incorporated herein by reference)
4.2* See Articles V and X of the Company's Certificate of
Incorporation and Article VI of the Company's Bylaws (filed as
Exhibit 4.2 to the Company's Registration Statement on Form
SB-2, file number 333-65097 and incorporated herein by
reference)
4.3* Form of Promotional Shares Lock-In Agreement (filed as Exhibit
4.3 to the Company's Registration Statement on Form SB-2, file
number 333-65097 and incorporated herein by reference)
4.4* Specimen Certificate of the Series A Preferred Stock (filed as
Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
for the Quarter ended June 30, 1999 and incorporated herein by
reference)
4.5* Certificate of Designation of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company's Quarterly Report on Form
10-QSB for the Quarter ended June 30, 1999 and incorporated
herein by reference)
4.6** Specimen Certificate of the Series B Convertible Preferred
Stock
4.7* Certificate of Designation of Series B Convertible Preferred
Stock (filed as Exhibit 4.1 to the Company's Quarterly Report
on Form 10-QSB for the Quarter ended September 30, 2000 and
incorporated herein by reference)
5.1** Opinion of Day, Edwards, Propester & Christensen, P.C. as to
the legality of the securities being registered
10.1* Employment Agreement by and between the Company and James L.
Smith (filed as Exhibit 10.1 to the Company's Registration
Statement on Form SB-2, file number 333-65097 and incorporated
herein by reference)
10.2* Employment Agreement by and between the Company and Charles L.
Smith (filed as Exhibit 10.2 to the Company's Registration
Statement on Form SB-2, file number 333-65097 and incorporated
herein by reference)
II-4
Name of Exhibit
---------------
Exhibit
Number
------
10.3* Stock Purchase Agreement by and between the Company and BCLIC
(filed as Exhibit 10.3 to the Company's Registration Statement
on Form SB-2, file number 333-65097 and incorporated herein by
reference)
10.4* Stock Purchase Agreement between the Company and Orville Homer
Miller et al. (filed as Exhibit 10.4 to the Company's
Registration Statement on Form SB-2, file number 333-65097 and
incorporated herein by reference)
10.5** Escrow Agreement between the Company and UMB Bank
10.6* Stock Purchase Agreement between the Company and CLS
Enterprises, Inc. (filed as Exhibit 10.6 to the Company's
Registration Statement on Form SB-2, file number 333-65097 and
incorporated herein by reference)
10.7* Designated Agency Officer Agreement (filed as Exhibit 10.7 to
the Company's Registration Statement on Form SB-2, file number
333-65097 and incorporated herein by reference)
10.8* Stock Purchase Agreement between Summit Life Corporation,
Seller, and First Alliance Insurance Company, Buyer, dated
November 10, 1999 (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed November 24, 1999 and
incorporated herein by reference)
10.9* Stock Purchase Agreement between Texas Savings Holding Company
and Great Midwest Life Insurance Company, dated February 15,
2000 (filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999, file
number 000-25253 and incorporated herein by reference)
21.1* List of subsidiaries (filed as Exhibit 21.1 to the Company's
Registration Statement on Form SB-2, file number 333-55722 and
incorporated herein by reference)
23.1** Amended Consent of Grant Thornton LLP, Independent Certified
Public Accountants
23.2** Consent of Day, Edwards, Propester & Christensen, P.C.
(included in Exhibit 5.1)
99.1** Amended Form of Subscription Agreement
* Previously filed.
** Filed herewith.
II-5
Item 28. Undertakings.
The undersigned Registrant hereby undertakes that:
(1) That, for the purpose of determining any liability under the
Securities Act, treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this Registration Statement as
of the time the Commission declared it effective.
(2) That, for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement of the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
(3) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:
(a) include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement. and
(c) include any additional or changed material information on the
plan of distribution.
(4) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the termination or end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has authorized this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Oklahoma City, State of Oklahoma, on May 7, 2001.
SUMMIT LIFE CORPORATION
an Oklahoma corporation
By: /s/ Charles L. Smith
--------------------
Charles L. Smith, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:
NAME AND TITLE DATE
-------------- ----
/s/ *James L. Smith May 7, 2001
---------------------------
James L. Smith,
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Charles L. Smith May 7, 2001
---------------------------
Charles L.Smith,
President, Chief Operating Officer and
Director
(Principal Executive Officer)
/s/ *M. Dean Brown May 7, 2001
---------------------------
M. Dean Brown,
Director
/s/ *Thomas D. Sanders May 7, 2001
---------------------------
Thomas D.Sanders,
Director
/s/ *Gary L. Ellis May 7, 2001
------------------------------------
Gary L. Ellis,
Director
/s/ Quinton L. Hiebert May 7, 2001
---------------------------
Quinton L.Hiebert,
Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
* By: Charles L. Smith
----------------
Attorney-in-fact
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has authorized this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Oklahoma City, State of Oklahoma, on May 7, 2001.
SUMMIT LIFE CORPORATION
an Oklahoma corporation
/s/ Charles L. Smith
By: _________________________
Charles L. Smith, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:
NAME AND TITLE DATE
-------------- ----
/s/ *James L. Smith
___________________________________________ May 7, 2001
James L. Smith,
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Charles L. Smith
___________________________________________ May 7, 2001
Charles L. Smith,
President, Chief Operating Officer and
Director
(Principal Executive Officer)
/s/ *M. Dean Brown
___________________________________________ May 7, 2001
M. Dean Brown,
Director
/s/ *Thomas D. Sanders
___________________________________________ May 7, 2001
Thomas D. Sanders,
Director
/s/ *Gary L. Ellis
___________________________________________ May 7, 2001
Gary L. Ellis,
Director
/s/ Quinton L. Hiebert
___________________________________________ May 7, 2001
Quinton L. Hiebert,
Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
II-8
INDEX TO FINANCIAL STATEMENTS
Summit Life Corporation
Consolidated Financial Statements as of and for the Years Ended
December 31, 1999 and 2000
Report of Independent Certified Public Accountants................. F-3
Consolidated Balance Sheets........................................ F-4
Consolidated Statements of Operations.............................. F-6
Consolidated Statement of Stockholders' Equity..................... F-7
Consolidated Statements of Cash Flows.............................. F-8
Notes to Consolidated Financial Statements......................... F-10
F-1
[THIS PAGE LEFT BLANK INTENTIONALLY]
F-2
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Summit Life Corporation
We have audited the accompanying consolidated balance sheets of Summit Life
Corporation and Subsidiaries, as of December 31, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Summit
Life Corporation and Subsidiaries, as of December 31, 1999 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 21, 2001
F-3
Summit Life Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1999 2000
---------- ----------
INVESTMENTS
Debt and equity securities $3,286,869 $2,939,740
Notes receivable 312,864 941,878
Short-term investments 1,470,000 --
Policy loans 37,947 33,382
Investment real estate, net of accumulated depreciation of
$6,080 in 1999 72,580 --
Investments in limited partnerships -- 57,300
---------- ----------
5,180,260 3,972,300
CASH AND CASH EQUIVALENTS 935,746 1,436,338
RECEIVABLES
Accrued investment income 85,753 41,984
Advances to affiliates 10,000 9,928
Other 4,808 --
---------- ----------
100,561 51,912
PROPERTY AND EQUIPMENT - AT COST
Building and improvements 129,419 129,419
Furniture and equipment 114,470 116,570
Automobiles 54,015 22,015
---------- ----------
297,904 268,004
Less accumulated depreciation 88,573 102,638
---------- ----------
209,331 165,366
Land 56,000 56,000
---------- ----------
265,331 221,366
OTHER ASSETS
Cost in excess of net assets of business acquired, less
accumulated amortization of $5,000 in 1999 and $ 10,000
in 2000 45,000 40,000
Deferred policy acquisition costs 42,226 57,527
Value of purchased insurance business, less accumulated
amortization of $52,965 in 1999 and $101,872 in 2000 370,758 321,851
Deferred income taxes 37,241 37,241
Other 38,698 24,147
---------- ----------
533,923 480,766
---------- ----------
$7,015,821 $6,162,682
========== ==========
The accompanying notes are an integral part of these statements.
F-4
Summit Life Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
----------- -----------
LIABILITIES
Policy reserves and policyholder funds $ 5,335,971 $ 4,708,295
Unpaid claims 107,000 175,951
accounts payable 74,742 39,458
accrued and other liabilities 28,713 15,424
Advances from affiliates 11,138 --
Notes payable 442,219 248,254
----------- -----------
5,999,783 5,187,382
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value - authorized, 5,000,000
shares; issued 2,267,605 shares 22,676 22,676
Series A cumulative preferred stock, $.001 par value -
authorized, issued, and outstanding, 5,000 shares;
stated at liquidation value 500,000 500,000
Series B convertible preferred stock, $.001 par value -
authorized, 1,000,000 shares; issued and outstanding,
350,000 shares in 2000; stated at liquidation value -- 350,000
Additional paid-in capital 2,923,596 2,923,596
Common stock of parent held by subsidiary - 19,000 shares (95,000) (95,000)
Series B convertible preferred stock subscribed -- 650,000
Accumulated other comprehensive loss (83,565) (19,882)
Accumulated deficit (2,251,669) (2,706,090)
----------- -----------
1,016,038 1,625,300
Less stock subscriptions receivable -- 650,000
----------- -----------
1,016,038 975,300
----------- -----------
$ 7,015,821 $ 6,162,682
=========== ===========
The accompanying notes are an integral part of these statements.
F-5
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1999 2000
---- ----
Revenues
Insurance premiums and other considerations $ 213,598 $ 152,624
Investment income 519,434 377,184
Net realized gains on sale of available for sale securities 5,202 91,679
Net losses on trading securities -- (159,755)
Other 74,500 109,025
----------- -----------
812,734 570,757
Benefits, losses, and expenses
Policy benefits 244,156 96,397
Increase in policy reserves 208,160 235,033
Interest 97,402 22,838
Taxes, licenses, and fees 58,437 43,071
Depreciation and amortization 308,803 93,431
General, administrative, and other operating 729,169 484,408
Loss on disposal of subsidiary 57,824 --
----------- -----------
1,703,951 975,178
----------- -----------
Loss before income taxes (891,217) (404,421)
Income tax benefit - current (7,538) --
----------- -----------
Net loss (883,679) (404,421)
Preferred stock dividends 28,830 50,000
----------- -----------
NET LOSS TO COMMON STOCKHOLDERS $ (912,509) $ (454,421)
=========== ===========
Basic and diluted net loss per common share $ (.42) $ (.20)
=========== ===========
Weighted average outstanding common shares, basic and diluted 2,177,196 2,248,605
=========== ===========
The accompanying notes are an integral part of these statements.
F-6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 2000
Series A cumulative Series B convertible
Common stock preferred stock preferred stock
------------------------- ------------------------ ------------------------
Shares Par Shares Liquidation Shares Liquidation
Total issued value issued value issued value
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 1999 $ 776,830 2,054,735 $ 20,547 -- $ -- -- $ --
Sale of common stock, net of offering
expenses of $110,488 711,934 163,770 1,638 -- -- -- --
Sale of preferred stock 500,000 -- -- 5,000 500,000 -- --
Collection of stock subscriptions
receivable 39,130 30,100 301 -- -- -- --
Issuance of common stock of parent
to subsidiary -- 19,000 190 -- -- -- --
Dividends on Series A preferred stock (18,627) -- -- -- -- -- --
Comprehensive loss
Net loss (883,679) -- -- -- -- -- --
Other comprehensive loss
Unrealized loss on investments, net (109,550)
-----------
Comprehensive loss (993,229)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 1,016,038 2,267,605 22,676 5,000 500,000 -- --
Sale of preferred stock 350,000 -- -- -- -- 350,000 350,000
Dividends on Series A preferred stock (50,000) -- -- -- -- -- --
Comprehensive loss
Net loss (404,421) -- -- -- -- -- --
Other comprehensive income
Unrealized gain on investments, net 63,683
-----------
Comprehensive loss (340,738)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 $ 975,300 2,267,605 $ 22,676 5,000 $ 500,000 350,000 $ 350,000
=========== =========== =========== =========== =========== =========== ===========
Common
stock of Accumulated
Additional parent other Stock
paid-in held by Stock comprehensive Accumulated subscriptions
capital subsidiary subscribed income (loss) deficit receivable
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 1999 $ 2,079,661 $ -- $ 39,130 $ 25,985 $(1,349,363) $ (39,130)
Sale of common stock, net of offering
expenses of $110,488 710,296 -- -- -- -- --
Sale of preferred stock -- -- -- -- -- --
Collection of stock subscriptions
receivable 38,829 -- (39,130) -- -- 39,130
Issuance of common stock of parent
to subsidiary 94,810 (95,000) -- -- -- --
Dividends on Series A preferred stock -- -- -- -- (18,627) --
Comprehensive loss
Net loss -- -- -- -- (883,679) --
Other comprehensive loss
Unrealized loss on investments, net (109,550)
Comprehensive loss
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 2,923,596 (95,000) -- (83,565) (2,251,669) --
Sale of preferred stock -- -- 650,000 -- -- (650,000)
Dividends on Series A preferred stock -- -- -- -- (50,000) --
Comprehensive loss
Net loss -- -- -- -- (404,421) --
Other comprehensive income
Unrealized gain on investments, net 63,683
Comprehensive loss
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 $ 2,923,596 $ (95,000) $ 650,000 $ (19,882) $(2,706,090) $ (650,000)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
F-7
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 2000
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (883,679) $ (404,421)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 303,472 86,627
Deferral of policy acquisition costs (26,631) (22,105)
Amortization of deferred policy acquisition costs 5,331 6,804
Interest credited to policyholder account balances 233,523 211,030
Gain on sale of investment securities, other than trading (5,202) (91,679)
Gain on sale of assets (1,664) (83,805)
Loss on disposal of subsidiary 57,824 --
Other (29,107) 26,604
(Increase) decrease in
Trading securities -- (113,643)
Accrued investment income 144,242 43,769
Other receivables (9,430) 4,808
Other assets (29,668) (5,449)
Increase (decrease) in
Policy reserves (28,388) 6,880
Unpaid claims -- 68,951
Accounts payable 154,710 (47,311)
Accrued and other liabilities (120,193) (13,289)
----------- -----------
Net cash used in operating activities (234,860) (326,229)
Cash flows from investing activities
Purchases of investment securities, other than trading (2,627,174) (3,728,505)
Proceeds from disposition or maturities of investment securities, other than trading 1,830,142 5,808,035
Net investment in limited partnerships -- (57,300)
Issuance of notes receivable (71,000) (517,000)
Payments received on notes receivable 1,015,251 49,297
Increase (decrease) in policy loans (12,226) 4,565
Payments on advances to affiliates -- 72
Purchase of property and equipment (6,636) (2,100)
Proceeds from sale of assets 165,500 8,419
Net cash paid in acquisition of business (406,766) --
Net cash acquired on disposal of subsidiary 86,869 --
----------- -----------
Net cash provided by (used in) investing activities (26,040) 1,565,483
Cash flows from financing activities
Deposits to policyholder account balances 67,009 166,857
Withdrawals from policyholder account balances (394,212) (1,012,443)
Payments on notes payable (1,492,731) (213,965)
Payments on advances from affiliates (4,862) (11,138)
Proceeds from issuance of notes payable 510,000 20,000
Proceeds from stock subscriptions receivable 39,130 --
Proceeds from sale of common and preferred stock 1,039,172 350,000
Dividends paid on preferred stock (18,627) (37,973)
Initial public offering costs (40,429) --
----------- -----------
Net cash used in financing activities (295,550) (738,662)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (556,450) 500,592
Cash and cash equivalents at beginning of year 1,492,196 935,746
----------- -----------
Cash and cash equivalents at end of year $ 935,746 $ 1,436,338
=========== ===========
F-8
Summit Life Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1999 2000
---------- -----------
Cash paid (received) during the year for:
Interest $ 246,000 $ 32,000
Income taxes (7,000) $ -
Noncash investing and financing activities:
Notes receivable acquired on sale of investment real estate $ - $ 94,000
Purchase of an automobile by the incurrence of a note payable 14,059 -
Conversion of convertible notes, other notes payable, and accrued interest
to common stock 281,700 -
Acquisition of Great Midwest Life Insurance Company in exchange for
issuance of note payable and cash (note M) 331,807 -
In conjunction with the acquisition, assets were acquired and
liabilities were assumed as follows:
Estimated fair value of assets acquired, including
cash and cash equivalents of $250,546 $ 1,349,905
Liabilities assumed (360,786)
Issuance of note payable (331,807)
-----------
Cash paid $ 657,312
===========
Disposal of Benefit Capital Life Insurance Company in exchange for
stock and cash (note N) 62,500 -
In conjunction with the disposal, assets were sold and
liabilities were transferred as follows:
Book value of assets sold, including cash and
cash equivalents of $432,460 $ 1,597,816
Liabilities transferred (958,163)
-----------
Net assets sold 639,653
Proceeds from sale
Cash received 519,329
First Alliance Corporation common
stock received 62,500
------------
581,829
Loss on disposal of subsidiary $ 57,824
============
The accompanying notes are an integral part of these statements.
F-9
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 2000
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
1. Basis of Consolidation and Nature of Operations
-----------------------------------------------
The consolidated financial statements include the accounts of Summit Life
Corporation (SLC) and its wholly owned subsidiaries (collectively, the
Company). Wholly owned subsidiaries included Summit Life and Annuity
Company (SLAC), Family Benefit Life Insurance Company (FBLIC), Benefit
Capital Life Insurance Company (BCLIC), and Great Midwest Life Insurance
Company (GMLIC). BCLIC was acquired on January 13, 1998 and was sold on
December 30, 1999. GMLIC was acquired on January 13, 1999. FBLIC was merged
into GMLIC with an effective date of February 1, 1999. In October 1999,
GMLIC and SLAC received the necessary regulatory approvals to complete a
reinsurance agree-ment which transferred all of SLAC's insurance business
to GMLIC. Effective November 24, 1999, SLAC was merged into SLC.
Intercompany transactions and balances have been eliminated.
SLC is a holding company which specializes in the sale of life insurance
products through its life insurance subsidiary, GMLIC. GMLIC is licensed in
Oklahoma and Texas and primarily sells fixed rate annuities and life
insurance products.
2. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions ___ that affect certain reported amounts and disclosures;
accordingly, actual results could differ from those estimates.
3. Cash and Cash Equivalents
-------------------------
cash equivalents include time deposits and certificates of deposit with
maturities when acquired of three months or less and money market funds.
The Company maintains its cash and cash equivalents in accounts which may
not be federally insured. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk
on such accounts.
4. Investments
-----------
The Company accounts for certain investments in debt and equity securities
as follows:
o Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
o Debt and equity securities that are bought and held principally for
the purpose of selling in the near term are classified as trading
securities and reported at fair value, with unrealized gains and
losses included in operations.
F-10
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
4. Investments - Continued
-----------------------
o Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and
losses excluded from operations and reported as other comprehensive
income (loss).
For individual securities classified as available-for-sale or
held-to-maturity, declines in the fair value below cost or amortized cost
that are other than temporary result in write-downs included in operations.
The specific identification method is followed in determining the cost of
securities sold.
Generally, notes receivable are stated at the aggregate of the unpaid
balances less estimated uncollectible amounts.
Short term investments are carried at cost, which approximates market. At
December 31, 1999, short-term investments consisted primarily of interests
in medical receivables.
Investment real estate is carried at depreciated cost.
Investments in limited partnerships are accounted for on the equity method.
Accordingly, the consolidated statements of operations include the
Company's share of the partnerships net operating results.
5. Property and Equipment
----------------------
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives on the
straight-line method. Useful lives range from five to 40 years.
Long-lived assets to be held and used, including investment real estate,
are reviewed for impairment whenever events or changes in circumstances
indicate that the related carrying amount may not be recoverable. When
required, impairment losses are recognized based upon the estimated fair
value of the asset.
6. Cost in Excess of Net Assets of Business Acquired
-------------------------------------------------
Cost in excess of net assets of business acquired is amortized on the
straight-line method over ten years.
If impairment indicators exist, management reviews the valuation and
amortization of cost in excess of net assets of business acquired. As part
of this review, the Company estimates the value and future benefits of the
net income to be generated by the related subsidiary to determine whether
impairment has occurred.
F-11
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
7. Income Taxes
------------
SLC and its subsidiary file separate income tax returns.
The Company recognizes current tax expense based on estimated amounts
payable or refundable on tax returns for the year.
Deferred tax liabilities or assets are recognized for the estimated future
tax effects attributable to temporary differences and carryforwards based
on provisions of the enacted tax law. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
8. Deferred Policy Acquisition Costs
---------------------------------
The costs of writing new business, consisting primarily of commissions and
certain costs of policy issuance, are deferred. Deferred policy acquisition
costs for life insurance products, including immediate annuities with life
contingencies, are amortized over the estimated lives of the policies.
Deferred policy acquisition costs for investment products, principally
single premium deferred annuities, are amortized with interest in relation
to the present value of the expected gross profits, based on estimated
investment yields, mortality, persistency, and surrender charges, over the
lives of the policies. Deferred policy acquisition costs are reviewed
periodically to insure that the unamortized balance does not exceed those
amounts recoverable from future profits.
9. Value of Purchased Insurance Business
-------------------------------------
Value of purchased insurance business represents the actuarially determined
present value of estimated net cash flows embedded in existing insurance
contracts when acquired and is amortized with interest based on the
incidence of the related cash flows. At December 31, 2000, approximately
13% of the unamortized value of purchased insurance business is expected to
be amortized in each of the next five years, based on current conditions
and assumptions as to future events on acquired policies in force.
An analysis of the value of purchased insurance business is presented below
for the years ended December 31:
1999 2000
Balance, beginning of year $ 272,465 $ 370,758
Acquisition 423,723 --
Imputed interest on unamortized balance at 6.5% 45,252 24,099
Amortization (182,842) (73,006)
Disposal of subsidiary (187,840) --
--------- ---------
Balance, end of year $ 370,758 $ 321,851
========= =========
F-12
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
10. Revenues and Policy Reserves and Policyholder Funds
---------------------------------------------------
Premiums received on deferred annuities and annuities without life
contingencies (i.e., investment contracts) are recorded as deposits into
the policyholder's account balance. Revenues relating to these contracts
consist primarily of withdrawal and administrative charges. Premiums for
life insurance products and for certain annuities with life contingencies,
including selection of annuity settlement options with life contingencies,
are recognized as revenues when due.
Policyholder account balances include amounts deposited by policyholders
plus interest credited, less withdrawals and any administrative charges
deducted by the Company. The liabilities for future policy benefits for
annuities with life contingencies are computed as the present value of
future benefit payments, including assumptions as to investment yields and
mortality.
Policy reserves for life insurance products are computed using assumptions
as to investment yields, mortality, morbidity, withdrawals, and other
assumptions based on the Company's experience, modified as necessary to
give effect to anticipated trends and to include provisions for possible
unfavorable deviations. Reserve interest assumptions range from 5.5% to 3%.
Such liabilities are, for some plans, graded to equal statutory values or
cash values at or prior to maturity. Policy benefit claims are charged to
expense in the period that the claims are incurred. All insurance-related
benefits, losses, and expenses are reported net of reinsurance ceded.
11. Earnings (Loss) Per Common Share
--------------------------------
Earnings (loss) per common share is computed based upon net earnings
(loss), after deduction of preferred stock dividends, divided by the
weighted average number of common shares outstanding during each period.
For 2000, Series B convertible preferred stock (see Note D) is
antidilutive; therefore, basic and diluted loss per common share are the
same.
12. Other Comprehensive Income (Loss)
---------------------------------
Accumulated other comprehensive income (loss) consists solely of net
unrealized investment gains (losses).
Unrealized gain (loss) on investments, net consists of the following for
the years ended December 31:
1999 2000
---- ----
Unrealized gain (loss) on investments arising during period $(104,348) $ 155,362
Less reclassification adjustment for gains included in net loss 5,202 91,679
--------- ---------
Unrealized gain (loss) on investments, net $(109,550) $ 63,683
========= =========
F-13
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
13. Reclassifications
-----------------
Certain reclassifications have been made to the 1999 consolidated
financial statements to conform to the 2000 presentation.
NOTE B - INVESTMENTS
Investments in securities are summarized as follows:
December 31, 1999
--------------------------------------------------
Cost/ Gross Gross Estimated
amortized unrealized unrealized fair
Type of investment cost losses gains value
------------------------------------------- ------------ ----------- ----------- ----------
Debt securities - available for sale
U.S. Treasury and other U.S. government
corporations and agencies $ 327,065 $ 134 $ (11,561) $ 315,638
Mortgage-backed securities 2,623,905 526 (56,238) 2,568,193
Industrial and miscellaneous 331,002 - (12,464) 318,538
----------- ----------- ----------- -----------
$ 3,281,972 $ 660 $ (80,263) $ 3,202,369
=========== =========== =========== ===========
Equity securities - available for sale $ 25,962 $ - $ (3,962) $ 22,000
=========== =========== =========== ===========
Equity securities - other $ 62,500
===========
December 31, 2000
--------------------------------------------------
Cost/ Gross Gross Estimated
amortized unrealized unrealized fair
Type of investment cost gains losses value
------------------------------------------- ------------ ----------- ----------- ----------
Debt securities - held to maturity
U.S. Treasury and other U.S. government
corporations and agencies $ 177,788 $ 14,312 $ - $ 192,100
Mortgage-backed securities 150,287 - (662) 149,625
------------ ----------- ----------- ----------
$ 328,075 $ 14,312 $ (662) $ 341,725
============ =========== =========== ==========
Debt securities - available for sale
Mortgage-backed securities $ 2,158,672 $ 11,576 $ (12,657) $2,157,591
Industrial and miscellaneous 281,732 - (12,716) 269,016
------------ ----------- ----------- ----------
$ 2,440,404 $ 11,576 $ (25,373) $2,426,607
============ =========== =========== ==========
Equity securities - available for sale $ 15,000 $ - $ (6,085) $ 8,915
============ =========== =========== ==========
Equity securities - trading $ 113,643
==========
Equity securities - other $ 62,500
============
F-14
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE B - INVESTMENTS - CONTINUED
The amortized cost and estimated fair values of debt securities, by
contractual maturity, at December 31, 2000 are shown below. Actual
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Held to maturity Available for sale
----------------------- -----------------------
Amortized Estimated Amortized Estimated
cost fair value cost fair value
---------- ---------- ---------- ----------
Due six to ten years $ -- $ -- $ 182,690 $ 171,796
Due after ten years 177,788 192,100 99,042 97,220
---------- ---------- ---------- ----------
177,788 192,100 281,732 269,016
Mortgage-backed securities 150,287 149,625 2,158,672 2,157,591
---------- ---------- ---------- ----------
$ 328,075 $ 341,725 $2,440,404 $2,426,607
========== ========== ========== ==========
Proceeds from sales of available-for-sale securities were approximately
$446,000 for 1999 and $3,609,000 for 2000. Gross gains of $7,387 for 1999
and $146,958 for 2000 and gross losses of $2,185 for 1999 and $55,279 for
2000 were realized on those sales.
Net losses on trading securities include $118,763 relating to trading
securities held at December 31, 2000.
For 2000, gross losses of $18,789 were included in net losses on trading
securities as a result of transfers of securities from the
available-for-sale category to the trading category.
Equity securities - other consist of First Alliance Corporation (FAC)
common stock carried at cost because fair value is not readily
determinable. These securities are restricted as to sale or transfer
through December 30, 2000 and FAC retains the right of first refusal to
purchase the shares through December 30, 2001.
F-15
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE B - INVESTMENTS - CONTINUED
Notes receivable consist of the following at December 31:
1999 2000
---- ----
Three promissory notes from an individual; due in monthly installments
through May and November 2010, including interest at 6.5% and 7%;
collateralized by real estate mortgages $ - $135,153
Two promissory notes from an individual; one with principal and
interest at 7.5% due December 2001, the other with interest due
monthly at 7.5% with principal due February 2010; collateralized by a
real estate mortgage - 325,000
Uncollateralized promissory note from a corporation; due with interest
at 10% in August 2001 - 150,000
Two promissory notes from a corporation (1) 183,428 227,745
Promissory note from an individual; renegotiated during 2000 to provide
for monthly installments of $1,000 through October 2005, including
interest at 9.75%; collateralized by real estate mortgage 53,425 46,322
Promissory note to an individual; renegotiated during 2000 to provide
for monthly installments of $990 through December 2004, including
interest at 7%; collateralized by certain commissions and life
insurance policy proceeds 47,892 41,345
Other 28,119 16,313
-------- --------
$312,864 $941,878
======== ========
(1) During 1998, an 8%, $240,000 ten-year first mortgage and
an 8%, $50,000 ten-year second mortgage were received in
conjunction with the sale of a building and related land for
$300,000 which had a carrying value of $220,000. The
transaction resulted in a gain of $80,000 which was deferred
and recognized on the installment method. In 2000, adequate
down payment was received and the remaining gain of $67,000
was recognized. Notes receivable at December 31, 1999 are net
of deferred gain of $67,000.
F-16
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE C - NOTES PAYABLE
Notes payable consist of the following at December 31:
1999 2000
---- ----
Uncollateralized note payable to stockholder, interest payable annually
at 6.75%, due February 1, 2000 $ 50,000 $ -
Uncollateralized note payable to stockholder, interest payable at
6.75%, due with principal on April 30, 2000 50,000 -
Bank line of credit, interest payable quarterly at the Wall Street
Journal prime (8.5% and 9.5% at December 31, 1999 and 2000,
respectively) plus .5%, due July 1, 2001; guaranteed by certain
officers and directors 110,000 130,000
Note payable to corporation, interest payable at 6%, due with annual
principal installments of approximately $111,000 through June 1, 2001 221,205 110,602
Note payable to bank, payable in monthly installments of $337 through
January 2003, including interest at 6.95%; collateralized by vehicle 11,014 7,652
-------- --------
$442,219 $248,254
======== ========
The aggregate maturities of notes payable for years subsequent to December
31, 2000 are as follows:
Year ending December 31
2001 $244,211
2002 3,873
2003 170
--------
$248,254
========
NOTE D - STOCKHOLDERS' EQUITY
On April 23, 1999, nonvoting Series A Cumulative Preferred Stock was
created. Semiannual dividends of $5 per share are cumulative. The
Series A preferred stock has priority as to liquidation value ($100 per
share) and dividends in arrears over common stock upon dissolution.
On September 29, 2000, Series B convertible preferred stock was
created. The Series B preferred stock is noncumulative, nonvoting, and
is convertible into one share of common stock at the option of the
holders after March 31, 2003. The Series B preferred stock is ranked
senior to common stock and junior to Series A preferred stock as to
payment of dividends. Upon the Company's dissolution, the Series B
preferred stock is ranked equivalent to the Series A preferred stock as
to liquidation value ($1 per share) and unpaid dividends.
F-17
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE E - INCOME TAXES
The components of net deferred tax assets and changes in the related
valuation allowance are as follows:
December 31,
----------------------
1999 2000
--------- ---------
Deferred tax assets
Net operating loss carryforwards $ 203,852 $ 284,002
Capital loss carryforward 62,494 63,501
Policy reserves and policyholder funds 38,782 14,835
Other 14,767 18,170
Valuation allowance for deferred tax assets (229,519) (293,666)
--------- ---------
90,376 86,842
Deferred tax liabilities
Value of purchased insurance business (51,906) (43,772)
Depreciation -- (2,182)
Other (1,229) (3,647)
--------- ---------
(53,135) (49,601)
--------- ---------
Net deferred tax assets $ 37,241 $ 37,241
========= =========
Increase in valuation allowance $ 65,508 $ 64,147
========= =========
A reconciliation of income tax benefit at the statutory rate to the Company's
effective rate is as follows at December 31:
1999 2000
---- ----
Expected statutory rate 34% 34%
Small life insurance company deduction (20) (20)
Increase in valuation allowance (7) (17)
Other (6) 3
---- ----
1% - %
---- ----
At December 31, 2000, the following operating loss carryforwards, which begin
expiring in 2010, were available for tax purposes:
SLC $1,595,000
GMLIC 329,000
F-18
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE F - RELATED PARTY TRANSACTIONS
The Company is affiliated with an insurance agency by common ownership and
management. During 1999, commissions of approximately $1,000 were paid to
this agency from SLAC under an agreement with the Oklahoma Insurance
Department.
From time to time, the Company makes advances to and receives advances from
affiliates, generally officers and stockholders. Such advances have no
specified repayment terms but are generally short-term in nature.
NOTE G - COMMITMENTS AND CONTINGENCIES
Under its annuity contracts, the Company is committed to credit interest on
policyholder account balances at guaranteed rates. During the first policy
year, the guaranteed rates range up to 8.5%. After the first year, the
lowest guaranteed rate is 3%.
Most states have established guaranty fund associations to ensure that
policyholders receive the benefit of the insurance products they have
purchased. The guaranty funds receive their funding through assessments to
companies which write business in the respective states. The Company is
liable for such mandatory assessments upon notification by the states;
however, such assessments may be partially recovered through a reduction in
future premium taxes.
Certain investments with carrying values of $277,979 were pledged to
regulatory authorities in accordance with statutory requirements at
December 31, 2000.
The Company leases certain equipment used in operations and storage space.
Rent expense under these leases for 1999 and 2000 was $16,322 and $1,851,
respectively. At December 31, 2000, there are no future commitments due to
terms being on a month-to-month basis.
The Company is involved in various legal actions relating to its operation.
Management believes that losses, if any, arising from such actions will not
be material to the Company's consolidated financial statements.
NOTE H - STATUTORY CAPITAL AND SURPLUS
SLC's insurance company subsidiary prepares its statutory-basis financial
statements in accordance with accounting practices prescribed or permitted
by the domiciliary state insurance department. "Prescribed" statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). "Permitted" statutory
accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The NAIC
has approved the Codification of Statutory Accounting Practices (the
Codification). The Codification will be effective on January 1, 2001. The
Company has not yet determined what effect, if any, the Codification will
have on its subsidiary's statutory financial statements.
F-19
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE H - STATUTORY CAPITAL AND SURPLUS - CONTINUED
GMLIC is required to maintain statutory capital and surplus of at least
$800,000. GMLIC's statutory capital and surplus, as reported at December
31, 1999, was adjusted to $732,000 as the result of a regulatory
examination in 2000. The Company and GMLIC took certain actions during
2000, with regulatory approval, to increase statutory capital and surplus
above the minimum required amount, and at December 31, 2000, GMLIC's
statutory capital and surplus amounted to $812,000. Failure to meet the
capital requirements in the future could expose GMLIC to regulatory actions
that may include restrictions on operations and growth, among other things.
GMLIC cannot declare dividends which exceed the greater of 10% of statutory
capital and surplus or the gain from operations of the preceding 12 months
without the prior consent of the Texas Commissioner of Insurance. The
maximum dividend which may be paid in 2001 without prior consent is
$12,000.
NOTE I - REGULATORY MATTERS
At periodic intervals, the domiciliary state insurance department routinely
examines the insurance company subsidiaries' statutory financial statements
as part of their legally prescribed oversight of the insurance industry.
Based on these examinations, the regulators can direct that the
subsidiaries' statutory financial statements be adjusted in accordance with
their findings.
NOTE J - REINSURANCE
The Company reinsures that portion of insurance risk which is in excess of
its retention limits, generally under yearly renewable term contracts.
Retention limits range up to $5,000 on life policies. Rein-surance premiums
are recognized as a reduction of insurance premiums and other
considerations over the policy term and totaled $52,000 and $37,000 for
1999 and 2000, respectively.
Reinsurance does not discharge or diminish the primary liability of the
Company on the risks reinsured; however, it does serve to limit the
Company's maximum loss on risks. The Company would be liable for the
reinsurance risks ceded to other companies in the event that reinsurers
were unable to meet their obligations.
At December 31, 1999 and 2000, reinsurance recoverables on policy reserves
were not significant.
NOTE K - EMPLOYMENT AGREEMENTS
The Company has employment agreements with its Chief Executive Officer and
President, both Company stockholders. The employment agreements provide,
among other things, for terms through March 2003, base and maximum
salaries, increases to base salaries subject to Board of Director approval,
annual bonuses, and benefits.
F-20
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE K - EMPLOYMENT AGREEMENTS - CONTINUED
The agreements may be terminated by mutual consent, by the Company at its
sole discretion without cause, or by the Company for cause, as defined. If
the agreements are terminated for cause, as defined, severance payments of
$50,000 are payable to each employee. If the agreements are terminated
without cause, severance payments to each employee will be equivalent to
the maximum salary over the term of the agreements less amounts previously
paid, but not less than $360,000 for the President and $450,000 for the
Chief Executive Officer.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of December 31, 1999 and 2000.
Such information, which pertains to the Company's financial instruments,
does not purport to represent the aggregate net fair value of the Company.
The carrying amounts in the table are the amounts at which the financial
instruments are reported in the consolidated financial statements.
Except as identified, all of the Company's financial instruments are held
for purposes other than trading. The fair values of debt and equity
securities are estimated based on quoted market prices for those or similar
investments. The carrying value of certain notes receivable and policy
loans approximate fair value due to nominal interest rate changes
subsequent to issuance. The fair value of other notes receivable is based
on discounted future cash flows using current rates at which similar loans
with similar maturities would be made to borrowers with similar credit
risk. The carrying amounts of cash, cash equivalents, short-term
investments, and receivables approximate fair values because of the short
maturity of those assets. Cash surrender value is used in determining the
fair value of investment contracts. Estimated fair value of notes payable
is the discounted amount of future cash flows using the Company's current
incremental rate of borrowing for similar liabilities.
1999 2000
----------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ---------- ---------- ----------
Financial assets
Debt securities - held to maturity $ - $ - $ 328,075 $ 341,725
Debt securities - available for sale 3,202,369 $3,202,369 2,426,607 2,426,607
Equity securities - available for sale 22,000 22,000 8,915 8,915
Equity securities - trading - - 113,643 113,643
Equity securities - other 62,500 (*) 62,500 (*)
Notes receivable 312,864 370,957 941,878 887,308
Short-term investments 1,470,000 1,470,000 - -
Policy loans 37,947 37,947 33,382 33,382
Cash and cash equivalents 935,746 935,746 1,436,338 1,436,338
Receivables 100,561 100,561 51,912 51,912
Financial liabilities
Policyholder account balances -
investment contracts $4,886,903 $4,673,874 $4,256,203 $4,101,159
Notes payable 442,219 440,987 248,254 248,254
(*) Sales prices for these securities are not quoted on an
exchange or over-the-counter; therefore, fair value is not
readily determinable.
F-21
Summit Life Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 2000
NOTE M - BUSINESS ACQUISITIONS
In January 1999, the Company acquired 100% of the outstanding common stock
of GMLIC in a business combination accounted for as a purchase. GMLIC was
primarily engaged in the sale of life insurance products in the state of
Texas. The results of operations of GMLIC have been included in the
accompanying consolidated financial statements since the date of
acquisition. The total cost of the acquisition was approximately $939,000.
Of the purchase price, cash of $607,000 was paid to seven of eight
stockholders with the eighth stockholder receiving a promissory note for a
principal amount of $332,000, payable in three equal annual installments at
an annual interest rate of 6% on the unpaid principal balance.
NOTE N - DISCONTINUED OPERATIONS AND DISPOSITIONS
On December 30, 1999, the Company sold 100% of the outstanding common stock
of BCLIC for $62,500 of First Alliance Corporation common stock (25,000
shares) and $519,329 in cash, resulting in a loss of $57,824. BCLIC's 1999
operating results included in the consolidated statements of operations
were revenues of $142,705 and benefits, losses, and expenses of $159,330.
F-22